We're talking about the five forces analysis, which is a tool for helping us think carefully about these five competitive forces that can have a negative impact on the prospects for profitability in the future in a particular industry or market segment. We're going to focus right now on the intensity of rivalry. When people think about strategic competition, this is the thing we think about most directly, this is how intense are we competing with our direct rivals in the industry. Many people think, "Oh, this is what strategy and competition is all about." As with all of the forces, do we want the intensity of rivalry to be high, or do we want it to be low? Well, it's better for the profitability prospects of the industry if the intensity of rivalry is lower. If rivalry is more intense that's going to drive down margins and it's going to make it much more difficult to eke out a profitable position in that industry. As always, we want to wonder to ourselves how do we know if rivalry is intense or not intense? How do we gauge these things? What sorts of things might we look at? Well, one thing we might look at is simply the number of competitors in the industry or market segment. This is a very simple blunt way of looking at this but it's oftentimes very useful. I want to test your intuition on this. Do you think rivalry will be lower or higher as the number of competitors goes up or down? In other words, if we want rivalry to be low, will rivalry be lower when the number of competitors is large, or is it going to be less intense when the number of competitors is small? Now, think about that for a minute. Oftentimes our intuition about this concept can be wrong. We tend to think about, I don't know, say our favorite football clubs when we think of FC Barcelona and Real Madrid, we think they have this intense rivalry. If there's less competitors that are rivals, the intensity of that rivalry might be greater. But this intuition is actually not what the intensity of rivalry from a competitive standpoint is talking about. Remember, all of these five forces are trying to tell us what are the prospects for profitability in the future in this industry. Let's take a business example of say Coke and Pepsi. Fierce rivals, very much so, they very much compete directly with each other and they're each other's primary competitor, but is the rivalry higher or lower than if there were more competitors in that space? It turns out rivalry goes down when the number of competitors is small. Again, the intuition here is Coke and Pepsi they might have a fierce rivalry but the thing is they've both carved out quite profitable positions in the industry that they're in. What would happen to their profits if all of a sudden there were a third player in that soft drink space that was viable? Would Coke and Pepsi's profits go up or would they go down? Their profits would likely go down and that's what Porter means by this idea of intensity of rivalry. Again, we're thinking about the industry and the prospects for profitability in the industry. The first thing for you to remember here is that we might just look at the number of firms competing in a particular industry or market segment and the smaller that number is, actually, the less intense the rivalry will be, and that's a good thing for the industry as a whole. That's the level of analysis here. Something else might drive rivalry to be lower which is if the incentives to fight in that industry are lower. What sorts of things might make the incentives to fight hard in a competitive market industry lower? Well, several things to consider here: First of all, if there is substantial market growth potential in the industry, that might just diminish the incentives for the firms in that industry to fight hard and get in a price war with each other, for example, because if the industry is just growing like gangbusters, everyone's got growth opportunity, there's room for everybody, we don't need to fight so directly with one another to steal each other sales, there's just enough here for everybody to enjoy. If the market growth trends in the industry are quite positive and the trajectory looks good, that might be an indication that the intensity of the rivalry is a little bit lower, it might drive that rivalry intensity down. What's another thing? Another thing might be are there opportunities to differentiate in that industry? We might have a bunch of direct competitors but the extent to which our products or services are quite differentiated from each other that might lower the need to engage in direct price competition with one another. In other words, we're dividing up the market and there is room for everybody in here. Opportunities to differentiate within a market segment might also drive down the incentives to fight and that might make the rivalry less intense. Now, the thing to look at is low exit costs. This is something that came into play when we were talking about threat of entry. If exit costs are high that might provide an incentive to fight any new entrants that are entering the industry. Same thing here, if exit costs are high, that's going to be an incentive to really fight each other to stay in this industry, but if the exit costs are low, then, in general, that's going to dampen the need to fiercely compete with the others in this industry. Another thing to think about is whether there's little excess capacity in the industry because that also is going to come into play here. To the extent that there's less capacity, everyone's operating on full steam and things may be good for everybody. One thing that's related to that that's worth thinking about is the cyclicality of demand. In a particular industry or market segment, when demand is not cyclical, that's going to drive down the intensity of rivalry. Let's think about the opposite for a moment. For instance, I live in a college town, so if we think about the hotel industry in this college town that I live in, it fluctuates based on time of year. There's certain football weekends, boy it's really hard to find a hotel room, but in the off-season, say, on any given Tuesday in the middle of the summer there may be so much excess capacity in hotel rooms that what does that cause? It causes the hotels to really drive down their prices in order to just get a few folks to get rooms at their hotels. When we're in the off-cycle of a cyclical business, that can really drive the rivalry up. We can think about that with auto manufacturing as well. When we're in a recession a lot of consumers might put off their car purchase, we can wait one more year till we're in a better situation. What happens in that situation, when we're in a recession and more and more consumers aren't buying cars, all of the automobiles have all this excess capacity, there's a bunch of excess inventory , and so what happens? They get in fierce pricing battles and drive prices ever downward and that's so that they can sell units, any units possible but it drives those margins to be near zero. Again, if demand is not cyclical, then we'll see rivalry won't be as intense, but if demand is more cyclical and it comes and goes in those off-seasons, that's when we'll really see firms going head to head on pricing and the like. One last thing to mention here is that rivalry can also be lower when it's feasible to do some coordination in the industry. We have to be careful here because, of course, explicit price and market fixing is illegal and it's an antitrust violation and there isn't any universe in which we would advocate that, but what we're describing is that the extent to which firms might be able to coordinate a little more tacitly, they're still competing on price but maybe they're playing a little more nicely with each other and they can't explicitly coordinate. But in airlines, for example, oftentimes there are opportunities for airlines to start a price war, but I think all of the airlines in a situation like are secretly hoping that no one starts it because once someone starts it, they all tend to price downward and margins, again, disappear. If there's an opportunity for firms in an industry or market segment to even tacitly or implicitly play nice with each other a little bit and coordinate if we want to think about it that way, that will also drive the rivalry down. All of these factors, the ways in which rivalry might be diminished, and when we're talking about the whole industry and the whole market segment, that's a good thing for the industry because it means profits will be higher
