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ACCA Strategic Professional · Strategic Business Leader · Competitive forces

Karrow Motors faces an industry in maturity with high fixed costs, near-identical products and low customer switching costs. Capacity exceeds demand and exit barriers are high because of specialised plant. Which conclusion best follows from the five forces analysis?

Rivalry will be very intense. Slow growth, high fixed costs, similar products, low switching costs and excess capacity push firms to cut prices to fill plants, while high exit barriers keep weak competitors in the market. The result is depressed industry profitability.

  1. ARivalry is likely to be very intense, with price wars and depressed industry profitabilityCorrect
  2. BRivalry will be weak because high exit barriers stabilise the industry
  3. CSupplier power is the only relevant force because fixed costs are high
  4. DThe threat of substitutes is irrelevant when products are identical

Explanation

Slow growth, high fixed costs, undifferentiated products, low switching costs, excess capacity and high exit barriers all intensify rivalry. Firms stay and fight for volume, so the weak-rivalry option is wrong because exit barriers keep surplus capacity in the market.

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