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CMA Intermediate · Operations Management and Strategic Management · Strategic Analysis and Strategic Planning

A packaged-tea company finds that coffee and ready-to-drink beverages are increasingly chosen by its customers at similar prices. In Five Forces analysis, this is best classified as which force, and what is its effect on industry profitability?

This is the threat of substitutes, which caps prices and lowers profitability. Coffee and ready-to-drink beverages come from other industries but satisfy the same need, so customers can switch if tea prices rise, limiting the pricing power of tea firms.

  1. ARivalry among existing firms, which raises profitability
  2. BThreat of substitutes, which caps prices and lowers profitabilityCorrect
  3. CSupplier power, which lowers input costs
  4. DThreat of new entrants, which raises entry barriers

Explanation

Products from other industries that meet the same customer need are substitutes. When attractive substitutes exist, customers can switch, which limits the price the industry can charge and reduces profit potential. Coffee is outside the tea industry, so it is not existing-firm rivalry.

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