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

Ritu Foods sells packaged snacks through large supermarket chains. Three chains buy 70% of its output, can easily switch to rival brands at no cost, and demand lower prices every year. Which Porter force is most prominent here, and what is the likely effect on the industry's profitability?

Buyer power is high because a few customers purchase most output, switch easily and push prices down. High buyer power erodes margins and lowers industry profitability. The pressure comes from customers, not suppliers or new entrants.

  1. AHigh bargaining power of buyers, which reduces profitabilityCorrect
  2. BHigh bargaining power of suppliers, which reduces profitability
  3. CLow bargaining power of buyers, which increases profitability
  4. DHigh threat of new entrants, which increases profitability

Explanation

Buyers are concentrated, buy a large share, face low switching costs and press for lower prices, so buyer power is high. This squeezes margins and reduces profitability. Supplier power is wrong because the pressure comes from customers.

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