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

Ravi Textiles operates in an industry where many buyers purchase standardised cotton yarn, switching suppliers costs buyers almost nothing, and yarn from competing mills is nearly identical. Which of Porter's five forces is most clearly strengthened by these conditions?

Bargaining power of buyers is strengthened. When products are standardised and switching costs are negligible, buyers can easily move between mills and demand lower prices or better terms. The scenario says nothing about entry barriers or supplier concentration, so the other forces are not the main issue.

  1. AThreat of new entrants, because capital needs are low
  2. BBargaining power of buyersCorrect
  3. CBargaining power of suppliers
  4. DThreat of substitutes, because yarn is identical

Explanation

Low switching costs and undifferentiated products let buyers move easily between mills and press for lower prices, which raises buyer power. The scenario gives no information on entry barriers or on supplier concentration. Identical products from rival mills are not substitutes from a different industry.

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