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

A mid-sized Indian airline operates on routes where it requires heavy capital for aircraft, strict regulatory licences and airport slots. Existing carriers also have strong loyalty programmes. Which of the following correctly describes the effect of these features on the industry's threat of new entrants?

The threat of new entrants is low. Heavy capital needs, regulatory licences, scarce airport slots and incumbents' loyalty programmes are all barriers to entry that make it hard and costly for newcomers to enter, and loyalty programmes raise customer switching costs.

  1. AThe threat is high, because capital requirements attract many investors
  2. BThe threat is low, because capital needs, licensing and incumbents' loyalty act as entry barriersCorrect
  3. CThe threat is high, because loyalty programmes reduce switching costs
  4. DThe threat is unaffected, since entry barriers influence only supplier power

Explanation

Large capital requirements, government licensing, scarce access to slots and customer loyalty are classic barriers to entry. They make entry difficult and reduce the threat of new entrants. Loyalty programmes raise, not lower, switching costs.

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