When looking at the number of Chinese restaurants in a large city or the competitive environment for power companies. Key aspects of intense rivalry include:
- Many firms of approximately the same size
- An industry experiencing slow growth
- Lack of differentiation
- Low switching costs for customers
- High fixed costs
- Perishable products
- The need to create new production capacity in large increments
- High barriers to exiting
- Diverse rivals
Barriers to Entry
In an industry the threat of new entrants is largely defined by the strength of the barriers erected to prevent them. As an entrant, you want the barriers to be low. As an established firm, you will want them to be high. For example, it is relatively easy to start a landscaping company, so competitors range from the neighborhood teenager with the family mower to larger companies with more expensive equipment and many employees.
Some of the key sources of barriers to entry include:
- Capital requirements
- Cost advantages
- Economies of scale
- Access to distribution channels
- Product differentiation
- Government policy
The level of threat posed by alternative products and services to industry customers matters. Substitutes cap the price a company can charge and affect the industry as a whole. For example, newspapers are closing down as people increasingly receive their news and other information via electronic media. The retail movie-rental business had been seen as a threat to movie theaters, and now those same retail rental stores are vanishing with the advent of Netflix and pay-per-view movies. Some defining factors include:
- Price competitiveness
- Supply availability
- Switching costs
- Public policies
The less bargaining power and control the suppliers of raw materials, components, and labors have over competitors, the more attractive the industry. Where there are a few powerful suppliers, new entrants will have little flexibility or control, both of which they need. Suppliers are more powerful when the following industry factors apply:
- There is domination by a few companies.
- The products are differentiated.
- Switching costs are high.
- Substitutes are not readily available.
- They can threaten to move into the business themselves.
- The industry is not important to the supplier.
This force is similar to that of suppliers, but on the demand side. The larger and more diverse the customer base, the less dependent competitors in an industry will be on particular customers. Where customers are many, they can exert control to force prices downward, quality upward, and margins to the floor. Generally, the more a company is recognized for being the low-priced leader in its industry, the more it applies pressure to its suppliers and will have the power to get what it wants. Buyers are more powerful in an industry if:
- They are concentrated.
- They purchase a lot.
- Products are undifferentiated or standard.
- Products are not a big part of the overall cost.
- Profits are low.
- Product quality is not important.
- Products do not save money for the buyer.
As you examine the industry in relation to each business idea, it will become easier to determine the current attractiveness of the industry. To further analyze the information, you can create a table listing each factor and assign a weight to each to develop a quantitative analysis of the competitiveness in each industry. Once you have selected the industry, it is time to find a defensible target or set of targets that you can claim and protect. You can design a successful focus strategy to foster business success if you have identified a niche of sufficient size to permit profitability. Identifying this niche and the potential growth of the segment will be an excellent precursor to completing financial feasibility analysis.