The Five Forces Model (Rivalry Among Existing Firms )

Rivalry Among Existing Firms
                    In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry. Some industries are fiercely competitive to the point where prices are pushed below the level of costs. When this happens, industrywide losses occur. In other industries, competition is much less intense and price competition is subdued. For example, the personal computer industry is so competitive that profit margins are extremely thin. ASUSTeK Computer, for example, was selling its Eee PC laptop for $350 in 2011. In contrast, the market for specialized medical equipment is less competitive, and profit margins are higher. There are four primary factors that determine the nature and intensity of the rivalry among existing firms in an industry:
Number and balance of competitors:
                    The more competitors there are, the more likely it is that one or more will try to gain customers by cutting prices. Price-cutting causes problems throughout the industry and occurs more often when all the competitors in an industry are about the same size and when there is no clear market leader.
Degree of difference between products:
                    The degree to which products differ from one producer to another affects industry rivalry. For example, commodity industries such as paper products producers tend to compete on price because there is no meaningful difference between one manufacturer’s products and another’s.
Growth rate of an industry:
                    The competition among firms in a slowgrowth industry is stronger than among those in fast-growth industries. Slow-growth industry firms, such as insurance, must fight for market share, which may tempt them to lower prices or increase quality to get customers. In fast-growth industries, such as pharmaceutical products, there are enough customers to satisfy most firms’ production capacity, making price-cutting less likely.
Level of fixed costs:
                   Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs. Once the break-even point is met, each additional unit sold contributes directly to a firm’s bottom line. Firms with high fixed costs are anxious to fill their capacity, and this anxiety may lead to price-cutting.