Rivalry is especially destructive to profi tability if it gravitates solely to price because price competition transfers profi ts directly from an industry to its customers.
LEADERSHIP AND STRATEGY – The Five Competitive Forces That Shape Strategy Discussion paper
soon become obsolete, and information may be perishable if it diffuses rapidly or becomes outdated, thereby losing its value. Services such as hotel accommodations are perishable in the sense that unused capacity can never be recovered.
Competition on dimensions other than price – on product features, support services, delivery time, or brand image, for instance – is less likely to erode profi tability because it im- proves customer value and can support higher prices. Also, rivalry focused on such dimensions can improve value relative to substitutes or raise the barriers facing new entrants. While nonprice rivalry sometimes escalates to levels that undermine industry profi tability, this is less likely to occur than it is with price rivalry.
Rivalry can be positive sum, or actually increase the aver- age profi tability of an industry, when each competitor aims to serve the needs of different customer segments, with dif- ferent mixes of price, products, services, features, or brand identities. Such competition can not only support higher av- erage profi tability but also expand the industry, as the needs of more customer groups are better met. The opportunity for positive-sum competition will be greater in industries serving diverse customer groups. With a clear understand- ing of the structural underpinnings of rivalry, strategists can sometimes take steps to shift the nature of competition in a more positive direction.
Factors, Not Forces Industry structure, as manifested in the strength of the fi ve competitive forces, determines the industry’s long-run profi t potential because it determines how the economic value created by the industry is divided – how much is retained by companies in the industry vsus bargained away by cus- tomers and suppliers, limited by substitutes, or constrained by potential new entrants. By considering all fi ve forces, a strategist keeps overall structure in mind instead of gravitat- ing to any one element. In addition, the strategist’s atten- tion remains focused on structural conditions rather than on fl eeting factors.
