Page 61 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 4: External Assessment

(b) Slow industry growth: Slow industry growth turns competition into fight because the Notes
only path to growth is to take sales away from a competitor.
(c) High fixed but low marginal costs: This creates intense pressure for competitors to cut
prices below their average costs even close to their marginal costs, to steal customers.

Example: Many paper and aluminium businesses suffer from this problem,
especially if demand is not growing.
(d) Lack of differentiation or switching costs: If products or services of rivals are nearly
identical and there are few switching costs, this encourages competitors to cut prices
to win new customers. Years of airline price wars reflect these circumstances in that
industry.
(e) Capacity augmentation in large increments: If the only way a manufacturer can increase
capacity is in a large increment, such as building a new plant, it will run that new
plant at full capacity to keep its unit costs low. Such capacity additions can be very
disruptive to the supply/demand balance and cause the selling prices to fall
throughout the industry.
(f) High exit barriers: Exit barriers keep a company from leaving the industry. Exit
barriers can be economic, strategic or emotional factors that keep firms competing
even though they may be earning low or negative returns on their investments. If
exit barriers are high, companies become locked up in a non-profitable industry
where overall demand is static or declining. Excess capacity remains in use, and the
profitability of healthy competitors suffers as the sick ones hang on.

Did u know? What are the Common Exit Barriers?
Common exit barriers are:
1. Investment in specialized assets like plant and machinery are of little or no value,
and cannot be put to alternative use. So, they have to be continued.
2. High costs of exit such as retrenchment benefits, etc. that have to be paid to the
redundant workers when a company ceases to operate.
3. Emotional attachment to an industry keep owners or employees unwilling to exit
from an industry for sentimental reasons.

4. Economic dependence on the industry when the firm depends on a single industry
for revenue and profit.

5. Government and social pressures discourage exit of industries out of concern for job
loss.
6. Strategic interrelationships between business units and others prevent exit because
of shared facilities, image and so on.
5. Bargaining power of buyers: The third of Porter’s five competitive forces is the bargaining
power of buyers. Bargaining power of buyers refers to the ability of buyers to bargain
down prices charged by firms in the industry or driving up the costs of the firm by
demanding better product quality and service. By forcing lower prices and raising costs,
powerful buyers can squeeze profits out of an industry. Thus, powerful buyers should be
viewed as a threat. Alternatively, if buyers are in a weak bargaining position, the firm can
raise prices, cut costs on quality and services and increase their profit levels. Buyers are

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