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CA Intermediate · Financial Management and Strategic Management · Strategic Analysis: External Environment

A cement manufacturer in Rajasthan buys most of its coal from two large suppliers. Coal has no close substitute for its kilns, and the cement firm contributes only a small part of the suppliers' sales. Switching to another supplier would involve heavy transport and re-engineering cost. Which conclusion about the five forces is most appropriate?

Supplier bargaining power is high. There are few suppliers, the input has no close substitute, the cement firm is an unimportant customer to them, and switching costs are heavy. All these conditions strengthen suppliers relative to the buyer.

  1. ABargaining power of suppliers is highCorrect
  2. BBargaining power of suppliers is low
  3. CThreat of substitutes is high
  4. DBargaining power of buyers is high

Explanation

Few suppliers, no substitute input, the buyer being unimportant to the suppliers, and high switching costs all raise supplier power. Hence supplier power is high, not low. Substitute threat is low because coal has no close substitute.

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