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

Several steel makers in India face a situation where a new entrant would need very large plants, long-term iron ore access and heavy capital to compete effectively, so very few firms enter despite high profits. Which feature of the Five Forces model best explains why the threat of new entrants is LOW?

The low threat arises from high entry barriers, namely economies of scale, heavy capital needs and restricted access to inputs like iron ore. These make it costly for newcomers to enter, whereas low switching costs, undifferentiated products or excess capacity relate to buyers or rivalry and do not deter entry.

  1. APresence of high entry barriers such as economies of scale and capital requirementsCorrect
  2. BLow switching costs for customers
  3. CProduct differentiation being absent so price is the only basis of competition
  4. DExcess capacity forcing price cuts among rivals

Explanation

Large scale needs, capital intensity and access to inputs are entry barriers that reduce the threat of new entrants. Low switching costs would, if anything, make entry easier, and excess capacity or lack of differentiation describe rivalry intensity, not entry.

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