ACCA Strategic Professional · Strategic Business Leader · Competitive forces
Norvik Telecom provides landline voice services. Mobile and internet calling now provide similar functionality at lower cost. A director proposes cutting landline prices sharply to retain customers. Which assessment best reflects strategic reasoning using the substitute threat?
Price cuts are unlikely to stop customers moving to a structurally better-value substitute and would erode margins. Norvik should consider repositioning, bundling, harvesting landlines or diversifying into mobile and internet services, because substitutes cap industry profitability rather than being defeated by price matching.
- APrice cuts are likely to be ineffective at reversing the decline and may erode margins, so repositioning or diversifying is more appropriateCorrect
- BPrice cuts will eliminate the substitute threat because price is the only buying criterion
- CPrice cuts are best because substitutes never affect long-term industry profitability
- DPrice cuts will deter new entrants but will not affect the substitute
Explanation
When substitutes offer superior price-performance and a structural shift is under way, matching on price rarely stops migration and sacrifices margin. Firms should consider differentiating, bundling, harvesting or moving into the substitute offering. Substitutes do cap industry profitability in the long term, so the claim they never matter is wrong.
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