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ACCA Strategic Professional · Strategic Business Leader · Competitive forces

Orlin Systems sells enterprise payroll software. Customers who change supplier must retrain staff, re-enter data and rewrite links to other systems, so most stay with Orlin even when rivals offer cheaper licences. A new entrant is considering the market. What does this situation imply for the threat of new entrants?

The threat of new entrants is reduced. High switching costs such as retraining, data re-entry and system integration mean customers will not move for a small price saving, so an entrant would have to offer a substantial advantage to win business, making entry less attractive.

  1. AThe threat is reduced, because buyers' switching costs make it hard for an entrant to win customersCorrect
  2. BThe threat is increased, because buyers have strong bargaining power over price
  3. CThe threat is unaffected, because switching costs relate only to rivalry among existing firms
  4. DThe threat is increased, because cheaper licences signal low capital requirements

Explanation

Switching costs are a barrier to entry because an entrant must offer a large enough benefit to compensate buyers for the cost of changing. Here the costs are high, so entry is less attractive. Option two is wrong because the cost of switching weakens buyers' power, not strengthens it.

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