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76 PART 2 • STRATEGY FORMULATION

provide competitive advantage over the strategies pursued by rival firms. Changes in
strategy by one firm may be met with retaliatory countermoves, such as lowering prices,
enhancing quality, adding features, providing services, extending warranties, and increas-
ing advertising.
Free-flowing information on the Internet is driving down prices and inflation
worldwide. The Internet, coupled with the common currency in Europe, enables con-
sumers to make price comparisons easily across countries. Just for a moment, consider
the implications for car dealers who used to know everything about a new car’s pricing,
while you, the consumer, knew very little. You could bargain, but being in the dark, you
rarely could win. Now you can shop online in a few hours at every dealership within
500 miles to find the best price and terms. So you, the consumer, can win. This is true
in many, if not most, business-to-consumer and business-to-business sales transactions
today.
The intensity of rivalry among competing firms tends to increase as the number of
competitors increases, as competitors become more equal in size and capability, as
demand for the industry’s products declines, and as price cutting becomes common.
Rivalry also increases when consumers can switch brands easily; when barriers to leav-
ing the market are high; when fixed costs are high; when the product is perishable;
when consumer demand is growing slowly or declines such that rivals have excess
capacity and/or inventory; when the products being sold are commodities (not easily
differentiated such as gasoline); when rival firms are diverse in strategies, origins, and
culture; and when mergers and acquisitions are common in the industry. As rivalry
among competing firms intensifies, industry profits decline, in some cases to the point
where an industry becomes inherently unattractive. When rival firms sense weakness,
typically they will intensify both marketing and production efforts to capitalize on the
“opportunity.” Table 3-11 summarizes conditions that cause high rivalry among com-
peting firms.

Potential Entry of New Competitors
Whenever new firms can easily enter a particular industry, the intensity of competitiveness
among firms increases. Barriers to entry, however, can include the need to gain economies
of scale quickly, the need to gain technology and specialized know-how, the lack of expe-
rience, strong customer loyalty, strong brand preferences, large capital requirements, lack
of adequate distribution channels, government regulatory policies, tariffs, lack of access to

TABLE 3-11 Conditions That Cause High
Rivalry Among Competing Firms

1. High number of competing firms
2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industry’s products
5. Falling product/service prices in the industry
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
9. When fixed costs are high among firms competing
10. When the product is perishable
11. When rivals have excess capacity
12. When consumer demand is falling
13. When rivals have excess inventory
14. When rivals sell similar products/services
15. When mergers are common in the industry