Competitors’ rivalry may be shown through much evidence, such as advertising campaigns, new product launches, price discount campaigns, product or service improvements, etc. The extent to which rivalry affects the industry’s profitability depends upon the intensity of the competition and the basis of the competition.

The intensity of rivalry is greater when:

  • There are a large number of competitors, or many of them are similar in size.
  • The slow industry growth intensifies the fights for market share.
  • Participants have industry leadership aspirations beyond economic performance, and so they have a passionate commitment to their business. This happens sometimes in the great international events, which are not profitable themselves but foster the reputation of the destination.
  • Different business models measure performance in different ways due to different strategic goals, and so it is difficult for them to monitor their rivals’ evolution, success and chances to gain market share. A diversity of rivals with different cultures, histories and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival’s moves.
  • Strategic stakes (investments) are high when a firm is losing market position or has potential for great gains. Over the last decade there has been a process of concentration affecting most of the major tour operators throughout Europe, taking advantage of the market growth.
  • Industry shakeout. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures.
  • Significant increase of the used production capacity increases offer and hence competition.
  • High exit barriers. This happens in some businesses with very specific assets that cannot be resold for other purposes, thus making it imperative to compete to recover the investment.

The dimensions in which rivals compete and the extent to which they compete in the same dimensions have a significant impact on the industry’s profitability. Rivalry is especially harmful to profitability when it is focused on price competition, as this pushes the prices down and favors only the customers. Price competition also makes the customers overlook other product features and focus only on price. Price competition is more likely to take place when:

  • Product differentiation is low (and there are few switching costs for buyers).
  • The overheads are high and the variable costs are proportionately low, pushing the prices down in some cases to near the marginal costs. This happens especially in the low season.
  • There needs to be a significant increase in capacity to make the business profitable.
  • The perishability of the product forces the price down to what the market is willing to pay, which in some cases is ridiculous. Over the last years there has been a trend to market the vacant rooms or packages through specialized “last minute” channels.

When the competition is based in other dimensions such as product differentiation, design, or branding, profitability is less likely to be damaged, as the competition drives rivals to innovate in creating more value for the customer, which is actually likely to end up pushing the prices up rather than cutting them. Further, value based competition builds barriers to entry and makes the potential substitutes less attractive or suitable.

Stronger rivalry occurs when competitors aim for the same positioning in the market, focusing on the same dimensions and so are trying to satisfy the same needs for the same targets. This usually ends up in a zero-sum competition, not increasing the profitability.

Rivalry turns into a positive sum –increase the industry’s average profitability- when each participant focuses on different targets, offering different products and services adapted to the target segment’s needs, with different features, different value added services, different branding, different price mix, etc. In this case, so long as the companies’ products satisfy better the clients’ needs, they build more barriers to entry, differentiate from substitutes and so they can also charge higher prices and increase their margins, increasing the business profitability. It is the challenge of the strategist to shift the nature of competition towards segmentation and differentiation in order to increase and secure profitability.

Industry rivalry may be measured by the Concentration Ratio (CR), indicating the percentage of market share held by the four largest firms in the industry. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which have a significant market share. These fragmented markets are said to be competitive.

If rivalry among firms in an industry is low, the industry is considered to be disciplined. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate or weak, based on the firms’ aggressiveness in attempting to gain an advantage.

In the tourism industry, there are two key trends that favor value based rivalry: market segmentation and leverage of the destination’s cultural identity to build more powerful brands.

However there is a considerable market for price sensitive customers, and once in the destination there is usually plenty of information about all accommodation and services choices, in which the price is one of the most visible features. Massive tourism destinations tend to compete on a price based type of rivalry.

To gain advantage over rivals, a destination may choose among several strategic moves:

  • Developing new products
  • Improving their segmentation strategy
  • Using the distribution channels more creatively to gain awareness and offer attractive deals
  • Developing a cost advantage to lower prices
  • Improving other aspects related to the destination’s competitiveness

How would you measure rivalry between destinations?

Posted by Jordi Pera

Jordi Pera is an economist passionate about tourism, strategy, marketing, sustainability, business modelling and open innovation. He has international experience in marketing, intelligence research, strategy planning, business model innovation and lecturing, having developed most of his career in the tourism industry. Jordi is keen on tackling innovation and strategy challenges that require imagination, entail thoughtful analysis and are to be solved with creative solutions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s