Asawasi Company, a relatively new company, is in the business of designing and building farm equipment and machinery. Whilst it has been successful in its first few years of operation, sales are now in decline as competition in the industry has intensified and there is greater rivalry between the competing organisations.
A review undertaken by consultants has recommended that in order to gain sustained competitive advantage, the company needs to establish the basis on which it can compete more effectively against its rivals in the future.
Required:
Describe the factors that can create competitive rivalry between organisations. (5 marks)
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Organisations that provide a similar product/service aimed at the same target market will experience a certain degree of competitive rivalry. The intensity of competitive rivalry within an industry will affect the profitability of the industry as a whole as price wars and advertising fees reduce the profits of the rivals.
Factors that can create competitive rivalry include:
- Low barriers to entry
Low barriers to entry to the industry increase the number of organisations in that industry and so rivalry is created. - Market growth
Rivalry is intensified when firms are competing for a greater market share in a total market where growth is slow or stagnant. - Cost structure
If fixed costs are high, there is short-term temptation to compete on price as any contribution from sales is better than none at all. - Switching costs
If switching costs are low, ie customers can easily change suppliers, then the suppliers will compete. In some industries, the Internet has increased both the number of suppliers and the ease of switching supplier, for example switching to an online bank. - Uncertainty
Uncertainty in the environment will increase rivalry. If one firm is unsure what another is up to there is a tendency to respond by developing a more competitive strategy. - High exit barriers
Exit barriers make it difficult for an existing supplier to leave the industry and as such will fight to maintain market share until they are forced out. - Strategic importance
If success in a particular market is a prime objective for a number of firms, these firms will be likely to act more competitively to succeed in that market.