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

In a fragmented industry, a regional dairy notices that many small local producers can easily start selling packaged milk because capital needs are low, brand loyalty is weak and distribution is open to all. Which conclusion about Porter's forces is most appropriate?

The threat of new entrants is high. Low capital requirements, weak brand loyalty and freely available distribution are all low entry barriers, so new producers can enter easily and compete, which weakens the profit potential of existing firms in the industry.

  1. AThreat of new entrants is high because entry barriers are lowCorrect
  2. BThreat of new entrants is low because many producers already exist
  3. CSupplier power is high because capital needs are low
  4. DRivalry is low because the industry is fragmented

Explanation

Low capital requirement, weak brand loyalty and open distribution are all low entry barriers, so the threat of new entrants is high. The existence of many producers does not lower the threat; fragmentation usually intensifies rivalry rather than reducing it.

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