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

A cement manufacturer is studying its industry. It finds that capital requirements for a new plant are very high, existing players enjoy cost savings from large-scale production, and customers can easily shift between brands with no switching costs. Which statement about Porter's forces is most accurate?

Threat of new entrants is low because high capital requirements and scale economies act as entry barriers, while buyer bargaining power is increased because low switching costs let customers move easily between brands. Both effects follow directly from the described facts.

  1. AThreat of new entrants is low because of scale economies and capital needs, while buyer power is raised by low switching costsCorrect
  2. BThreat of new entrants is high because of scale economies, and buyer power is low because of low switching costs
  3. CThreat of substitutes is the only force affected by these facts
  4. DSupplier power is high because of capital needs and low switching costs

Explanation

High capital needs and economies of scale are entry barriers, so the entry threat is low. Low switching costs make it easy for buyers to change suppliers, increasing buyer power. Option B reverses both effects.

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