CA Intermediate · Financial Management and Strategic Management · Strategic Analysis: External Environment
A firm in the Indian two-wheeler industry concludes the following from its external analysis: high number of rivals of similar size, slow industry growth, high fixed costs, and low product differentiation with low switching costs. Another firm adds that exit barriers are high because of specialised plants. Which conclusion about industry rivalry is MOST appropriate?
Rivalry is intense. Many similar-sized competitors, slow growth, high fixed costs, little differentiation and low switching costs all intensify competition, and high exit barriers keep weak firms in the industry instead of leaving, which sustains the price and promotion battles.
- ARivalry is mild, because slow growth discourages competitive moves
- BRivalry is intense, because balanced rivals, slow growth, high fixed costs, low differentiation and high exit barriers all intensify competitionCorrect
- CRivalry is mild, because high exit barriers make firms leave the industry quickly
- DRivalry cannot be assessed without knowing supplier concentration
Explanation
Many similar-sized rivals, slow growth (share must be taken from others), high fixed costs (pressure to fill capacity), low differentiation and low switching costs all raise rivalry. High exit barriers keep firms in the industry even when unprofitable, further intensifying rivalry; they do not make firms leave. Hence option 2.
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