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and conditions on which business is conducted. Increasing prices and reducing the
quality of its products are potential means used by suppliers to exert power over firms
competing within an industry. If a firm is unable to recover cost increases by its
suppliers through its pricing structure, its profitability is reduced by its suppliers’

actions.
Substitutes
This measures the ease with which buyers can switch to another product that
does the same thing, such as using aluminum cans rather than glass or plastic bottles
to package a beverage. The ease of switching depends on what costs would be
involved (e.g., while it may be easy to sell Coke or Pepsi in bottles or cans,
transferring all your data to a new database system and retraining staff could be
expensive) and how similar customers perceive the alternatives to be. Substitute
products are goods or services from outside a given industry that perform similar or
the same functions as a product that the industry produces. For example, as a sugar
substitute, NutraSweet places an upper limit on sugar manufacturers’ prices—
NutraSweet and sugar perform the same function but with different characteristics.
Other product substitutes include fax machines instead of overnight deliveries,
plastic containers rather than glass jars, and tea substituted for coffee. Recently, firms
have introduced to the market several low-alcohol fruit-flavored drinks that many
customers substitute for beer. For example, Smirnoff’s Ice was introduced with
substantial advertising of the type often used for beer. Other firms have introduced
lemonade with 5% alcohol (e.g., Doc Otis Hard Lemon) and tea and lemon
combinations with alcohol (e.g., BoDean’s Twisted Tea). These products are
increasing in popularity, especially among younger people, and, as product
[9]
substitutes, have the potential to reduce overall sales of beer.
In general, product substitutes present a strong threat to a firm when customers
face few, if any, switching costs and when the substitute product’s price is lower or
its quality and performance capabilities are equal to or greater than those of the
competing product. Differentiating a product along dimensions that customers value
(such as price, quality, service after the sale, and location) reduces a substitute’s
attractiveness.
Rivalry
This measures the degree of competition between existing firms. The higher
the degree of rivalry, the more difficult it is for existing firms to generate high profits.
The most prominent factors that experience shows to affect the intensity of firms’
rivalries are (1) numerous competitors, (2) slow industry growth, (3) high fixed costs,
(4) lack of differentiation, (5) high strategic stakes and (6) high exit barriers.
Numerous or Equally Balanced Competitors
Intense rivalries are common in industries with many companies. With
multiple competitors, it is common for a few firms to believe that they can act
without eliciting a response. However, evidence suggests that other firms generally
are aware of competitors’ actions, often choosing to respond to them. At the other
extreme, industries with only a few firms of equivalent size and power also tend to
have strong rivalries. The large and often similar-sized resource bases of these firms
permit vigorous actions and responses. The Fuji/Kodak and Airbus/Boeing

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