Competitive Intensity

What Is Competitive Intensity?

Competitive Intensity is the pressure enterprises are required to handle in a market where several companies compete for market share and growth. It can be described as the level of aggression and the speed with which businesses operate and react to business moves of other companies to compete in a cut-throat market.

Two different forms of actions may come from this intense battle for market share: winning a superior position or developing a better reaction capacity due to positioning emphasis. The competitive intensity level, or the level of competition, reflects how hard it is for brands to grow their sales by any method other than gaining market share.

• Competitive intensity refers to the strong competition observed between the many enterprises competing in a given market or industry.
• The level of competitive intensity in a market offers useful information to competition authorities and policymakers, as it helps them make policy decisions about business loans, international trade, and subsidies, among other things.
• Competition in this form delivers many positive outcomes, with the most common advantage being innovation. Other advantages include employment opportunities, price reductions, and economic growth.
• The concentration of firms, market growth rate, costs, product differentiation, and switching costs are some critical determinants of competitive intensity.

Competitive Intensity Explained

Competitive intensity describes a state of fierce competition characterized by a large number of market competitors and limited opportunities for further growth. Competition intensifies in this environment as each contender tries to outwit the others.

When a growing number of businesses in an industry engage in increasingly harsh competition, business performance may decline. However, some internal elements, including strong management support, can have a favorable effect on how a business performs. This performance continues to be a crucial criterion for determining a company's success despite the influence of external factors like the intensity of competition and internal factors like managerial support.

The competitive intensity level in a market offers crucial information to competition authorities and policymakers, as it helps them make informed decisions to promote industrial and economic growth. Competitive intensity is known to result in many positive outcomes—the most common outcome being innovation. It pushes firms to be innovative to stay competitive.

The problems of today and tomorrow are often answered by creativity, which helps companies manage the fierce competition in various markets and maintain their market position. Innovation helps differentiate one company's products from another, and customers are usually willing to pay extra if they feel they derive value from it. Apart from ensuring adequate cash flows and income generation, innovation fuels the development of new technologies. Technological developments result in better lifestyle opportunities and greater well-being of people in any economy.

The next advantage companies enjoy pertains to decreased prices when there is ample competition and no monopoly. This means there is no price maker in the market, prompting an overall price reduction as alternatives are available. Hence, the competitive intensity pricing game might benefit consumers. Also, people find employment opportunities when multiple businesses produce several products and services. Therefore, economic growth is a key positive consideration of competition in this form.

Determinants

Some primary determinants of competition intensity in the market are:

• The concentration of firms: The higher the number of businesses in the market or industry, the more intense the competition or competitive intensity rivalry. This is in stark contrast to markets where monopoly prevails. In a monopoly, one firm rules the market, and typically, competition is limited or non-existent. Hence, no competitive intensity rivalry due to a single player's dominance is seen in monopolistic markets.
• Market growth rate: A key element that greatly affects the competitive intensity level is the rate of market expansion. The market is more likely to be competitive when growth is slow. This happens because the market is on the verge of saturation, and severe competition is observed between existing rivals for market share. On the other hand, rivalry is generally less intense or feeble when the market is expanding rapidly. This is because emerging markets and new business prospects attract more competitors, increasing the market's overall size. As a result, businesses are free to concentrate on growing their customer base instead of fighting for a higher share of the current market. 
• Costs: An important aspect that affects the degree of competitive intensity is the cost structure prevalent in a sector or industry, specifically the ratio of fixed costs to variable costs. When fixed costs are high relative to variable costs, businesses are forced to lower their prices to function at full capacity, intensifying competition. Companies might participate in price wars to entice customers, which could result in lower profit margins and decreased profitability. 
• Product differentiation: The degree of market competition is heavily influenced by product differentiation. When products become common commodities, competition revolves around price, leading to intense rivalry. On the other hand, highly differentiated products are challenging to replicate, allowing companies to charge a premium and reducing the intensity of the competition. 
• Switching costs: These costs are crucial in determining a market's competitive intensity level. High switching costs reduce rivalry, especially for specialized products, while low switching costs increase competition, particularly for commodity products. This is because specialized products require significant investment in terms of learning how to use the product, or they may be tailored to a customer's requirements. Therefore, businesses must consider switching costs in their industry and develop strategies that encourage customer loyalty to remain competitive.

Examples

The examples below illustrate the scope, level, and application of competitive intensity.

Example #1

Let us assume a food supplier company, XYZ, wants to open an outlet near a renowned college. The company needs to assess the intensity of competitiveness in this market. Therefore, it tries to figure out if:

• It is essential to analyze and understand if the existing outlets are of a similar type in the target area.
• It is difficult to enter, sustain, or grow in this market.
• Suppliers are easily available and if yes, they find out their charge and the cost of raw materials.
• The buyer preference and behavior change are in line with price changes. If yes, they try to assess how sensitive the buyers are to price changes.
• The variety of products (food, in this case) available to consumers is already good.

After compiling information against each question listed above, the next important factor XYZ must consider is the level of competition between existing competitors. They must also assess how existing companies differentiate their products to stay ahead of the competition. Once every relevant factor is considered, XYZ can make a decision and freeze a plan.

Example #2

In the electronics and tech industry, Apple and Samsung are two major rivals. The competition between these two giants, especially in the smartphone segment, is severe—almost potent. Apple began transforming the smartphone landscape rapidly in 2007, and Samsung increased its efforts in the same direction in no time. When Apple introduced Apple Watch and Airpods, Samsung also introduced comparable devices in this category.

Both companies regularly launch products worldwide, especially to take advantage of holidays, when customers are usually willing to spend freely. Due to continued innovation and consistent product launches, both companies profit. In the same vein, their rivalry has benefited customers greatly, as they get access to many excellent products. The competitive intensity is almost palpable as Apple and Samsung strive to overtake each other. These tech giants are immensely popular, enjoying a high market share. In this way, competitive intensity is furthering the cause of growth as well as customer satisfaction.

How To Measure?

Different approaches can be used to measure the degree of competitive intensity in markets that hold varying notions and ideas of competition (which may be structuralist or behavioral). The level of analysis may differ, too, which may be macro or micro based on the scale applicable to an industry, market, or sector. They could also differ in line with the market level, where market participants may be limited or multiple.

When the metric is based on the unit of analysis, it typically considers the quantifiable aspects of a business or brand. Businesses generally apply multiple approaches to understand the intensity of competition in their industry based on specific needs.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to What is Competitive Intensity. We explain it with its examples, how to measure it, and its determinants. You can learn more about it from the following articles –

• Industry Analysis
• Winner’s Curse
• Non-Price Competition