CA Intermediate · Financial Management and Strategic Management · Strategic Analysis: External Environment
Vistara Paints operates in an industry where growth is slowing, many competitors of similar size exist, fixed costs are high and product differentiation is low. Which of Porter's forces is most intense, and what is the likely effect?
Rivalry among existing competitors is most intense, leading to price wars and lower profitability. Slow industry growth, many equally sized rivals, high fixed costs pushing firms to fill capacity, and weak differentiation all increase competitive pressure and erode margins.
- ARivalry among existing competitors; price wars and reduced profitabilityCorrect
- BThreat of new entrants; higher industry margins
- CBargaining power of suppliers; lower input costs
- DThreat of substitutes; reduced fixed costs
Explanation
Slow growth, numerous balanced competitors, high fixed costs and low differentiation all intensify rivalry, typically causing price cutting and squeezed profits. The other pairings give effects that do not follow from the conditions described.
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