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

Kaveri Textiles operates in an industry where industry growth has slowed, fixed costs are high, capacity is added in large increments, exit barriers are heavy because of specialised looms, and rival products are almost undifferentiated. Which conclusion about the industry is best supported under Porter's framework?

Rivalry is likely to be intense. Slow growth, high fixed costs, lumpy capacity additions, heavy exit barriers and undifferentiated products all push firms to compete on price for market share, which typically leads to price wars and low industry profitability.

  1. ARivalry among existing competitors is likely to be intense, leading to price wars and low profitabilityCorrect
  2. BRivalry will be mild because high exit barriers keep firms disciplined
  3. CThe threat of substitutes will automatically be low because products are undifferentiated
  4. DBuyer power will be low because the industry is slow-growing

Explanation

Slow growth, high fixed costs, large capacity increments, high exit barriers and lack of differentiation are each factors that intensify rivalry. Firms stuck in the industry fight for share, often cutting prices. Option B reverses the effect of exit barriers. Options C and D draw conclusions not supported by the stated facts.

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