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

A regional Indian airline operates in a market where fares are set by aggressive price cuts, rivals have high fixed costs and exit barriers such as leased aircraft, and demand growth has slowed. Rail operators are also introducing faster trains on the same routes. Which of the following statements best interprets the Five Forces position?

Rivalry is intense and the threat of substitutes is rising, so profitability is likely to be pressured. Price cutting, high fixed costs, exit barriers and slow growth heighten rivalry, while faster trains offer travellers an alternative that meets the same need.

  1. ARivalry is intense, and the threat of substitutes is rising, so industry profitability is likely to be pressuredCorrect
  2. BRivalry is weak because high fixed costs discourage price cuts, so profitability is protected
  3. CThreat of substitutes is low because rail is a different mode of transport
  4. DBuyer power is the only force relevant, as fares are the only variable

Explanation

High fixed costs, high exit barriers and slow growth intensify rivalry and encourage price wars. Faster trains offer a substitute for the same need of travel. Together they depress profitability. Treating rail as non-substitute ignores that substitutes meet the same need through a different product.

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