The degree of competition in a market depends on the moves and countermoves of various firms active in the market. It usually starts with one firm trying to achieve a favorable position by pursuing appropriate strategies. Because what is good for one firm may be harmful to rival firms, rival firms respond with counter strategies to protect their interests. Intense competitive activity may or may not be injurious to the industry as a whole. For example, while a price war may result in lower profits for all members of an industry, an advertising battle may increase demand and actually be mutually beneficial.

Opportunity Potential A promising market is likely to attract firms seeking to capitalize on an available opportunity. As the number of firms interested in sharing the pie increases, the degree of rivalry increases. Take, for example, the home computer market. In the early 1980s, everyone from mighty IBM to such unknowns in the field as Timex Watch Company wanted a piece of the personal computer pie. As firms startedjockeying for position, the intensity of competition increased manifold. Anumber of firms, for example, Texas Instruments and Atari, were forced to quit the market. At the same time, new competitors such as Dell and Compaq entered the market, undermining even IBM.

Ease of Entry When entry into an industry is relatively easy, many firms, including some marginal ones, are attracted to it. The long-standing, committed members of the industry, however, do not want “outsiders’’ to break into their territory. Therefore, existing firms discourage potential entrants by adopting strategies that enhance competition.

Nature of Product When the products offered by different competitors are perceived by customers to be more or less similar, firms are forced into price and, to a lesser degree, service competition. In such situations, competition can be really severe.

Exit Barriers For a variety of reasons, it may be difficult for a firm to get out of a particular business. Possible reasons include the relationship of the business to other businesses of the firm, high investment in assets for which there may not be an advantageous alternative use, high cost of discharging commitments (e.g., fixed labor contracts and future purchasing agreements), top management’s emotional attachment to the business, and government regulations prohibiting exit (e.g., the legal requirement that a utility must serve all customers).

Homogeniety of the Market When the entire market represents one large homogeneous unit, the intensity of competition is much greater than when the market is segmented. Even if the product sold is a commodity, segmentation of the market is possible. It is possible, for example, to identify frequent buyers of the commodity as one segment; and occasional buyers as another. But if a market is not suited to segmentation, firms must compete to serve it homogeneously, thus intensifying competition.

Industry Structure When the number of firms active in a market is large, there is a good chance that one of the firms may aggressively seek an advantageous position. Such aggression leads to intense competitive activity as firms retaliate. On the other hand, if only a few firms constitute an industry, there is usually little doubt about industry leadership. In situations where there is a clear industry leader, care is often taken not to irritate the leader since a resulting fight could be very costly.

Commitment to the Industry When a firm has wholeheartedly committed itself to a business, it will do everything to hang on, even becoming a maverick that fearlessly makes moves without worrying about the impact on either the industry or its own resources. Polaroid Corporation, for example, with its strong commitment to instant photography, must maintain its position in the field at any cost. Another example is Gillette’s commitment to the shaving business. Such an attachment to an industry enhances competitive activity.

Feasibility of Technological Innovations In industries where technological innovations are frequent, each firm likes to do its best to cash in while the technology lasts, thus triggering greater competitive activity.

Scale Economies Where economies realizable through large-scale operations are substantial, a firm will do all it can to achieve scale economies. Attempts to capture scale economies may lead a firm to aggressively compete for market share, escalating pressures on other firms. A similar situation occurs when a business’s fixed costs are high and the firm must spread them over a large volume. If capacity can only be added in large increments, the resulting excess capacity will also intensify competition. Consider the airlines industry. Northwest Airlines commands 73% of the traffic at Detroit Metropolitan Wayne County Airport, and it wants to keep it that way by discouraging competitors. For example, a few years back, an upstart Spirit Airlines entered the Detroit-Philadelphia market with one-way fare of $49, while Northwest’s average one-way fare was more than $170. Northwest soon slashed its fares to Philadelphia to $49 on virtually all seats at all times, and added 30% more seats. A few months later, Spirit abandoned the route and Northwest raised its fare to more than $220.

Economic Climate During depressed economic conditions and otherwise slow growth, competition is much more volatile as each firm tries to make the best of a bad situation.

Diversity of Firms Firms active in a field over a long period come to acquire a kind of industry standard of behavior. But new participants invading an industry do not necessarily like to play the old game. Forsaking industry patterns, newcomers may have different strategic perspectives and may be willing to go to any lengths to achieve their goals. The Miller Brewing Company’s unconventional marketing practices are a case in point. Miller, nurtured and guided by its parent, Philip Morris, segmented the market by introducing a light beer to an industry that had hitherto considered beer a commodity-type product. When different cultures meet in the marketplace, competition can be fierce.