In our competitive forces model, we include a sixth force, the power of complementary goods and/or services providers. The model helps a company understand the risks in the industry it is operating in and decide how it wants to execute its strategies in response to competition.
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Intensity of Industry Rivalry
There are multiple factors that can impact the intensity of rivalry within an industry.
Concentration of rivals – the more competitors, the more intense the rivalry
Product homogeneity – industries selling very similar products are likely to be more competitive
Consumer switching costs – if it costs consumers a lot to switch from one company’s product to a competitor’s, the company is likely to face less competition
Excess production capacity – when there is excess production capacity available in an industry, there is a higher chance of increased rivalry as companies find the industry more attractive to enter
Brand loyalty – rivalry is high when customers have low brand loyalty
Network effects – refers to the positive effect on the value of a product when there is an additional user of the product. When a network effect exists, the value of a product or service increases as more people are using it.
Suppliers can credibly threaten forward integration in the industry
Rivals purchase a small percentage of the suppliers’ products
Purchasers’ price elasticity is high when:
There are few alternative suppliers available
There are few substitute inputs available
Switching costs are high for purchasers
Threat of Substitute Goods/Services
Companies are likely to experience a high threat of substitute goods/services when:
Switching costs are low for customers
Substitutes have superior pricing relative to the current products
Substitutes have better attributes or performance characteristics
Power of Complementary Good/Service Providers
Complementary goods or services can add value to the existing products in an industry. However, when complements have unattractive features or do not provide any value to consumers, they can actually become an issue for the industry by slowing growth and limiting profitability.
When developing strategies for a business, decision-makers should consider how they can potentially encourage complement providers to integrate and become a part of the business. Successful integration with complement providers is likely to expand market opportunities and bring profit-enhancing benefits to the business.
Thank you for reading CFI’s guide to the Competitive Forces Model. Additional relevant CFI resources include: