Deck 3: Industry Analysis: the Fundamentals

Question 1

The greater the value of a product to its customers,the more profitable will it be to supply that product.

Answer 1

False

Question 2

According to Charlie Munger,the profitability in the reinsurance industry is depressed by the fact that many companies believe it to be an attractive business.

Answer 2

True

Question 3

In a "contestable market" it is actual entry rather than the threat of entry that keeps prices at their competitive level.

Answer 3

False

Question 4

Suppliers of technically-sophisticated components are more likely to be able to exercise supplier power than the suppliers of raw materials.

Question 5

Michael Porter's five forces of competition framework links the structure of an industry to its overall level of profitability.

Question 6

The bargaining power of a buyer when negotiating with a supplier is all about relationship management;it does not depend upon the threat of walking away from the deal.

Question 7

Lower levels of capacity utilization impose higher costs on firms (as fixed costs are spread over a smaller volume of business).This encourages firms to raise prices.

Question 8

Formal,broad-based scanning of the external environment is an essential activity for all business enterprises.

Question 9

A product that has close substitutes will tend to have inelastic demand.

Question 10

Economies of scale,absolute cost advantages,high capital requirements,and limited access to channels of distribution give incumbent firms an advantage over new entrants to an industry.

Question 11

If a firm is to create profit,the first condition is that it must supply a product for which the price the customer is willing to pay exceeds the cost incurred in supplying that product.

Question 12

The more similar are the firms in an industry in terms of costs,strategies,and locations,the more intensely will they compete.

Question 13

An exit barrier is anything that is an impediment to excess capacity leaving an industry.

Question 14

The reason that the shares of steel,automobile and chemical companies are regarded as "cyclical" is that the high fixed costs of these industries make profits highly sensitive to changes in the level of demand.

Question 15

The main reason that niche markets are often highly profitable for incumbents is because their customers tend to be insensitive to prices.

Question 16

"Producer surplus" is not a form of "economic rent."

Question 17

Concentration in an industry is measured by its concentration ratio-a common measure of which is the combined market share of the leading firms.

Question 18

Entry barriers that are effective against small,start-up companies tend to be equally effective against established firms diversifying from other industries.

Question 19

According to Warren Buffett brilliant managers can succeed,even in businesses with poor
fundamental economics.

Question 20

Threats of retaliation by incumbents against a new entrant (e.g.threatening to make aggressive price-cuts),cannot be regarded as a source of entry barriers.

Question 21

Although washing machines and refrigerators are not close substitutes as far as consumers are concerned,we can consider them to be part of the same industry because of supply-side substitutability.

Question 22

The effectiveness of barriers to entry depends upon:

A)How quickly new technologies emerge
B)How fiercely incumbents retaliate against new entrants
C)The resources and capabilities that potential entrants possess
D)How vigorously governments enforce competition law

Question 23

Given the range of external influences that impact a firm,understanding the external environment requires managers to:

A)Use a framework or a system to organize relevant information
B)Monitor competitors closely
C)Use all existing sources and techniques to gather and analyze information
D)Devote a large proportion of their time to this task

Question 24

Which of the following does not enhance buyers' bargaining power

A)Low switching costs for buyers
B)The size of buyers relative to that of sellers
C)A high level of differentiation among the products that buyers purchase
D)The ability of buyers to backward integrate

Question 25

The core of a firm's business environment is comprised by:

A)Its relationships with customers,competitors and suppliers
B)Its technological environment
C)Its relationships with all stakeholders
D)The nation state

Question 26

Official industry classifications such as the Standard Industrial Classification mean that there is no ambiguity over delineating industry boundaries.

Question 27

The profits earned by firms in an industry,are determined by:

A)The intensity of competition among the firms within the industry
B)How much customers value the products supplied by the industry
C)The extent to which the industry is protected by barriers to entry
D)The value of the product tor customers,the intensity of competition,and the relative bargaining powers of producers,their suppliers and their buyers

Question 28

Economic value is created when:

A)The price that customers pay for a product exceeds the costs of producing it
B)Competition causes surplus value to be transferred from producers to consumers
C)The price that customers are willing to pay for a product exceeds the price they actually pay
D)The price that customers are willing to pay for a product exceeds the cost producing it

Question 29

Bargaining power rests,ultimately,on:

A)The negotiating skills of the buyer versus the seller
B)Tradition
C)The respective effectiveness and cohesion of top management teams
D)The relative costs that each party would incur from walking away from the deal

Question 30

Batteries represented about 45% of the cost of electric vehicles in 2018.Because battery prices are expected to decline at the rate of about 5% per year for the next six years,electric vehicles will become increasingly profitable for automobile manufacturers

Question 31

Economies of scale are a barrier to entry because:

A)New entrants are positioned at the top of their learning curve
B)New entrants are uncertain about their future costs which discourages then from making investments
C)New entrants face a risk of retaliation from the incumbents whose large scale of operation allows them to flood the market
D)New entrants face high unit costs either because they enter at sub-optimal scale,or they make a large-scale entry that initially operates with substantial excess capacity

Question 32

If an industry earns a return on capital in excess of its cost of capital:

A)It will soon attracts the attention of competition authorities
B)Workers will push for higher pay and benefits causing the level of profitability to fall
C)It will attract the attention of potential entrants and,unless protected by high barriers to entry,the return on capital will fall
D)Firms within the industry will over-invest causing the return on capital to fall

Question 33

Firms supplying niche markets are often highly profitable because:

A)They tend to supply specialty products for high income consumers
B)They tend to be sufficiently small that a single firm can often establish a dominant position
C)They tend to be disregarded by major corporations
D)They tend to have high entry barriers

Question 34

In identifying key success factors in an industry,it is sufficient to concentrate upon the factors which determine how customers choose between alternative suppliers.

Question 35

The basic premise of industry analysis is that:

A)Most industries lie on a spectrum between perfect competition at one end and monopoly at the other
B)The level of profitability within an industry is determined by the systematic influence of the industry structure
C)Industry profitability depends upon the interaction among competing firms
D)Technology and consumer demand are the basic forces that shape industry structure

Question 36

The relationship between seller concentration and industry profitability is:

A)Strongly positive-increasing concentration is almost always followed by increasing profit margins
B)Mainly negative-as industries become more concentrated,the competition between leading firms for market dominance becomes more aggressive
C)Dependent upon the size of the industry
D)Statistically weak.

Question 37

Industries where a decline in demand is most likely to cause industry-wide losses tend to have the following characteristics:

A)High concentration,lack of product differentiation and scale economies
B)High exit barriers,lack of product differentiation,and a high ratio of fixed to variable costs
C)High exit barriers,lack of product differentiation,and powerful buyers
D)Powerful buyers and suppliers and high exit barriers

Question 38

In commodity businesses,such as growing wheat,mining for gold,or fabricating DRAM semiconductors,the principal key success factors are concerned with the sources of cost efficiency.

Question 39

The mergers and acquisitions that have increased seller concentration in iron ore mining,chemicals,and the US airline industry and in the world metals mining industry were motivated by the desire to save costs,not to reduce competition in order to raise prices.

Question 40

As the competitors in an industry become more diverse in terms of their goals,cost structures,and strategies,it is likely that:

A)Their incentives to collude on price increase
B)They will compete more fiercely on price
C)Their products will become increasingly differentiated
D)Mergers,acquisitions and alliances among them will increase

Question 41

Identifying key success factors within an industry requires answers to the following questions:

A)What do customers want and what should the firm do to survive competition?
B)What is a firm's unique selling proposition?
C)Which of the five forces of competition most threaten a firm's survival and how could the firm deal with them?
D)What are the main sources of a company's cost efficiency?

Question 42

A market's boundaries are determined by:

A)The geographical extent of the markets that are supplied by the incumbents
B)The type of product which is sold,and the type of customers willing to pay for the product
C)Price homogeneity-within the confines of a market,a single price rules
D)Substitutability on both the demand side and the supply side

Question 43

Initiatives to improve an industry's profitability through changing its structure are:

A)Only feasible for the dominant player within an industry
B)More difficult in fragmented industries than in concentrated industries
C)Feasible in any industry that is subject to ruinous price competition
D)Always risky because they attract the attention of antitrust authorities

Question 44

The restrictions that governments place on the advertising of tobacco products:

A)Reduce the demand for tobacco thereby depressing profitability
B)Reduce the marketing costs of tobacco companies and impede the entry of newcomers to the market,boosting the profitability
C)Cause both (a)and (b)
D)Cause neither (a)nor (b)

Question 45

To obtain a license to drive a "black cab" taxi in London,requires passing a rigorous test of the driver's knowledge of London's streets and buildings involving 2 to 4 years of study.This test affects the profitability of the London taxi industry:

A)Negatively,because of the debts that future taxi drivers accumulate during their training
B)Negatively,because it encourages native Londoners,who are already familiar with the city,to enter the industry
C)Positively because they restrict entry to the industry
D)Positively,because "doing the knowledge" increases solidarity among London's taxi drivers.if such licenses can be sold on a secondary market

Question 46

For most business enterprises a market is:

A)An abstract concept-from the point of view of competition it is a continuum from a firm's closest competitor towards more distant competitors
B)A sociological concept that is defined mainly by convention and institutions
C)Geographical concept defined by the location of customers and competitors
D)All the above

Question 47

Key success factors are:

A)Factors that allow rivals to undermine a firm's competitive advantage
B)The sources of competitive advantage within an industry
C)The forces of competition that are most influential in determining industry profitability
D)The generic strategy that is most closely aligned with customer preferences

Question 48

In practice,drawing industry boundaries is:

A)A subjective exercise that depends upon the personal preferences of top managers
B)An objective exercise that requires estimating cross-elasticities of demand for the industry's products
C)A matter of judgment that depends upon the purpose of the analysis
D)Critical to the output of the analysis and therefore should only be undertaken with the help of an academic or consultant

Question 49

The most useful approach to forecasting industry profitability in the future is:

A)To estimate the industry's revenues and costs in future years
B)To use an industry's probability at similar stages of the business cycle in the past as an indicator of future profitability
C)To extrapolate the trend of industry profitability into the future
D)To understand how the industry's structure has determined competitive intensity and profitability in the past,then to use information on an industry's changing structure to predict how profitability is likely to change in the future

Question 50

Airlines' frequent flyer programs and retailer loyalty schemes are both examples of efforts to:

A)Offer disguised price reductions to customers
B)Establish product differentiation by measures that reward customer loyalty
C)Establish competitive advantage that failed because they could be easily imitated by competitors
D)Promote a company's product to new customers

Question 51

Profitability of the wireless communications services industry tends to be low throughout the world.A major reason for this is::

A)In most markets there are only three or four competitors
B)In almost every country,the national government is a monopoly supplier of wireless spectrum
C)Entry barriers are high due to the high costs of infrastructure
D)Increased video streaming is increasing the demand for wireless telecommunications