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Competitive forces

Competitive forces are the factors and variables that threaten a company’s profitability and prevent its growth. They are generally grouped into two categories:

Direct forces that determine how low the floor can go for price competition. They include:

  • Intensity of direct competition measured by number of competitors, degree of product standardization, amount of excess production capacity
  • Customer negotiating power, which is influenced by customer expectations towards product quality and price

Indirect forces that place a ceiling on a market’s prices and profits. They include:

  • The threat of indirect competition—the availability of products that offer similar performance
  • The possibility of new entrants into the marketplace
  • Supplier pressure—where demand for inputs is high, suppliers can raise their prices
  • Regulatory pressure—laws and regulations affecting customer and supplier behaviour and the availability of substitute products and services

Companies use the insights from their SWOT analysis to address these forces. In addressing them, the objective is not only to counter these forces but also to state how a company can get a competitive advantage. These insights are refreshed annually as part of the strategic planning process and a company’s responses are stated in its strategic plan.

Related definitions

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