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

Kavya Foods operates in an industry where products are nearly identical, many small rivals exist, industry growth is slow, exit barriers are high because of specialised plants, and fixed costs are heavy. Which conclusion about the competitive rivalry is best supported?

Rivalry is intense. Slow growth forces firms to take share from each other, heavy fixed costs encourage price cutting to fill capacity, high exit barriers keep weak firms in the market, and near-identical products make price the main basis of competition.

  1. ARivalry is weak because products are identical and rivals are small
  2. BRivalry is intense because slow growth, high exit barriers, high fixed costs and low differentiation push firms to compete on priceCorrect
  3. CRivalry is weak because high exit barriers make firms leave quickly
  4. DRivalry cannot be assessed without knowing the number of buyers

Explanation

Slow growth means firms gain share only from rivals; high fixed costs push firms to fill capacity by cutting prices; high exit barriers keep weak firms in; undifferentiated products make price the basis of competition. All raise rivalry. Option C is wrong since high exit barriers prevent departure.

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