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

A Hyderabad pharmaceutical firm analyses its industry and finds the following: (i) a few large suppliers control a patented raw material with no alternative; (ii) heavy capital investment and regulatory approvals are required to enter; (iii) hospitals buy in bulk through tenders. Which conclusion about the firm's strategic position is most consistent with Porter's five forces?

The correct conclusion is high supplier power, low threat of new entrants and significant buyer power. A patented input with few suppliers gives suppliers leverage, capital and approval requirements deter entrants, and bulk tender purchases by hospitals strengthen buyers.

  1. ALow supplier power and high threat of new entrants, making the industry highly attractive for new firms
  2. BHigh supplier power and low threat of new entrants, with buyer power also being significantCorrect
  3. CHigh supplier power and high threat of new entrants, since regulatory approvals attract rivals
  4. DLow supplier power and low buyer power, since the raw material is patented

Explanation

Few suppliers controlling a unique input with no alternative means high supplier power. Heavy capital and regulatory approvals are entry barriers, so threat of new entrants is low. Bulk tender buying by hospitals gives buyers concentrated purchasing power. Options claiming high entry threat or low supplier power contradict these facts.

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