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

Himalaya Tea Estates operates in a mature industry. Over the years it has seen: (i) slow market growth, (ii) many equally sized rivals, (iii) high fixed costs, and (iv) low product differentiation with low switching costs. Another firm, Neelgiri Foods, faces the same pattern. Which statement best describes the resulting competitive position?

Rivalry among existing competitors is intense. Slow growth forces firms to fight for share, equal-sized rivals lack a leader, high fixed costs push price cutting to fill capacity, and low differentiation with low switching costs lets customers move freely, all of which heighten competition.

  1. ARivalry among existing competitors is intense, because slow growth, equal-sized rivals, high fixed costs and low differentiation all heighten itCorrect
  2. BRivalry is mild, because high fixed costs discourage price cutting
  3. CRivalry is mild, because equal-sized rivals avoid competing
  4. DRivalry is irrelevant, because switching costs are low and buyers have no power

Explanation

Each of the four features is a recognised determinant of intense rivalry: slow growth makes firms fight for share, equal sizes remove a clear leader, high fixed costs push firms to fill capacity by cutting prices, and low differentiation or switching costs make customers move easily. The options claiming mild rivalry reverse the effect of these factors.

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