Deck 3: Industry Analysis: the Fundamentals

Question 1

Are the forces at work in industry "a given" from a firm's point of view?

Answer 1

In other words, can the firm impact in any way the structure of the industry and therefore influence the level of profitability it might expect? Or is the structure immutable, or changing without any possible control on the firm's part?
The structure of the industry is largely a given and evolves independent of a firm's actions. However, an individual firm may influence the structure by its own actions, especially if its size gives it a strong presence in the industry.
Firms can introduce a new business model (Dell in the PC industry, Netflix in the video rental industry, Amazon.com in the book retailing industry) or can change its offering system in a way that modifies the rules of the industry game (change of technology, targeting a different segment of the market, proposing a new product, modifying the switching costs, or consolidating the industry, etc.)

Question 2

How can one manage to study hundreds of variables in a firm's environment to help determine its strategy?

Answer 2

The determination of the best strategy relies among other factors on the analysis of the external environment of the firm.
This environment can be split into the general environment which comprises diffuse and general trends, and the industry environment which consists of the events and players that are closer to the firm and impact its activity more directly.
However, the general environment also has influence on the industry environment.
Therefore, a firm's analysts need a comprehensive framework that will help them to sort the variables by category, to distinguish the vital from the important, and to determine which trends and phenomena are likely to impact their industry and their activities. Frameworks allow us to classify, to understand the environment and to decrease the probability of missing something important.
Still, the exercise remains difficult and requires skills and experience in the industry.

Question 3

In a nightclub, a single supplier of beverages can charge a price that exploits its position and the customers' willingness-to-pay. If many suppliers could offer their products on the same site:

A)The suppliers would collude to maintain an artificially high selling price to preserve their return
B)The customers would not change their level of consumption, leading to a decrease in the return for all suppliers
C)The existence of many suppliers would drive down prices to the cost of supplying these beverages (with the assumption that no collusion emerges)
D)The economic rent would significantly increase for all suppliers

Answer 3

C

Question 4

Why do the Porter's five forces of competition explain the attractiveness of the industry?

Question 5

Analyzing key success factors leads one to ask the following two questions:

A)What do customers want which we could supply and what should the firm do to survive competition?
B)What do customers want and what type of operational changes should a firm implement to survive competition?
C)Which of the five forces of competition are critical for a firm's survival and how could the firm deal with them?
D)What should managers do to analyse information collected from the market and the firm's operational units?

Question 6

The value to managers of understanding key success factors is:

A)Self-evident
B)Legitimate because it is accepted by the academic world
C)In question because some important academics disagree with it
D)Generally accepted by the corporate, consulting and academic worlds, but as with most business concepts and models, there are always some detractors.

Question 7

Regulations in banking, telecommunications, and broadcasting industries are:

A)An illustration of barriers to entry imposed by legal or professional authorities
B)An illustration of unfair protections of incumbents enacted by governments and regulators
C)Linked to the technical aspects of these industries that nobody could handle without the help of the government
D)Only an illustration of the intervention of the state on business practices

Question 8

The market in which a consumer product competes is, in reality:

A)Precisely defined, with a specific analysis of products, markets, and rivals
B)A continuum, with no clearly defined boundary
C)The market for all products which consumers may choose to spend their money on, in some sense.
D)Answers b and c

Question 9

Why can we notice heterogeneity in the returns of different industries and the generally consistent patterns of these returns across countries?

Question 10

Which method should be used to study the environment: Porter's five forces model of competition or the PEST model?

Question 11

How could a firm protect itself and grow in an industry characterized by low barriers to entry?

Question 12

Which is the most difficult?

A)Identifying the boundaries for furniture manufacturing industries in comparison to the same analysis for television programming and entertainment industries (Fox and NBC)
B)Describing the key success factors for steel, airlines and automobiles in comparison to identifying the critical factors for Fox and NBC in the television programming and entertainment industries
C)Analyzing the bargaining power of suppliers in cartels (such as OPEC) in comparison to identifying the bargaining power of customers in the Personal Computer industry
D)Identifying the boundaries between service industries in comparison to doing the same between manufacturing industries

Question 13

Why is the current industry profitability a poor predictor of future profitability?

Question 14

What should be the level of detail of key success factors?

Question 15

Industries exhibit strong differences, such as the chewing tobacco industry and the Chicago grain market:

A)Both are trading assets or items which are ethically questionable
B)Each illustrates, respectively, a situation of quasi-monopoly and a situation of perfect competition
C)Each illustrates, respectively, a situation of perfect competition and a situation of quasi-monopoly
D)Each illustrates, respectively, a situation of low risk and a situation of high risk in terms of business activity fluctuations

Question 16

Which characteristics differentiate industries such as, on the one hand, aircraft manufacturers and commercial satellites, and, on the other hand, e-service and fast food industries?

A)The second category of industries has very few players whereas the first category of industries is very fragmented, with thousands of players
B)The capital requirements are very high for the first category and moderate for the second category
C)The first category is highly sophisticated and requires top notch technical skills, whereas the second category relies upon marketing competencies
D)The intensity of competition is lower in the first category of industries than in the second category

Question 17

The question "What does a firm need to survive competition?":

A)Can be addressed through a careful analysis of competitors using all possible means, even at the edge of legality and ethics
B)Can be addressed by studying very carefully the two largest rivals in the industry
C)Requires an understanding of the current and future basis of competition specific to the industry
D)Can never be answered clearly, because competitors will not divulge what they are doing

Question 18

Key success factors are:

A)Factors that lead a firm's rivals to be successful in the industry
B)Factors derived from the competitive environment that a firm must satisfy if it is to succeed
C)Entirely internal factors which determine a firm's ability to survive and prosper
D)Factors in the five forces of competition that are critical for a firm's survival and prosperity

Question 19

An industry "direct modeling of profitability" is defined in the text as:

A)The identification of the drivers of a firm's relative profitability within an industry
B)The statistical modeling of the profit as determined by several variables, using multiple regression analysis
C)The comparative modeling of one industry versus another industry.
D)Setting up a model of industry profitability from the interaction of the Five Forces

Question 20

The question "What do customers want?":

A)Is not relevant because customers will show their preferences through their behavior
B)Must be asked by managers, and an accurate answer obtained and understood, since it's the driving force behind generating profit.
C)Can be addressed by an extremely good Market Research company.
D)Is best answered by ensuring that certain managers are educated in Marketing.

Question 21

Economies of scale are a barrier to entry because:

A)New entrants do not know where they are positioned on their learning curve
B)New entrants do not know the economies they can generate in the future and therefore cannot precisely determine their selling price
C)New entrants face a risk of retaliation from the incumbents which could occur immediately on a large scale and start a price war as a deterrent of their entry
D)New entrants face the cost and risk of creating large scale capacity to start with or a severe cost disadvantage if they enter on a smaller scale

Question 22

A "Duopoly" is:

A)The closest structure to Imperfect competition
B)When there are essentially only two competitors in an industry.
C)The closest structure to Perfect competition
D)When a firm has a monopoly in two industries at the same time.

Question 23

In practice, drawing the boundaries of industries and markets is:

A)A matter of personal preference on behalf of top managers
B)Almost impossible to carry out with rigor because it requires many "rules of thumb" and approximations
C)Largely a matter of judgment and experience contingent on 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 24

A market's boundaries are defined by:

A)The geographies 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)Substitutability on the demand side and substitutability on the supply side
D)Substitutability on both the demand side and the supply side, combined with an element of judgment depending on context and purpose

Question 25

In an industry, the profits earned by firms are determined by:

A)The overall economic situation, and Porter's five forces of competition
B)The degree of concentration of the industry
C)The existence of barriers to entry in the industry
D)The value of the product for customers, the intensity of competition, and the relative bargaining powers of producers, their suppliers and their buyers

Question 26

Regarding industry concentration;

A)A high Concentration Ratio indicates an efficient industry, which economists prefer.
B)A very high Concentration Ratio means that small companies cannot survive in this industry. .
C)A high Concentration Ratio indicates an inefficient industry
D)A very high Concentration Ratio would tend to indicate a mature industry exhibiting oligopolistic traits.

Question 27

Firms in any industry can be said to operate in two major markets:

A)The labor market and the output market
B)As a buyer in the supplier market, and as a seller in the customer market.
C)The labor market and the input markets
D)The product market divided at least in two segments (such as mid.size car and SUV market segments)

Question 28

Barriers to exit are:

A)The non-refundable costs of quitting or scaling down capacity in an industry
B)Legal restrictions which prevent a firm from leaving an industry.
C)The opposite of barriers to entry.
D)Of no consequence if you don't plan to leave the industry.

Question 29

Market and industry are:

A)Very specific economics terms which must be rigidly adhered to
B)Are concepts which require careful consideration of their philosophical underpinning to use correctly.
C)Somewhat flexible in scope depending on what aspect of business you are considering
D)Close concepts where market is identified with broader sectors, while industries refer to specific technologies

Question 30

"Consumer surplus" is:

A)The difference between the price customers expect to pay, and the price they would have been willing to pay
B)The total of all the differences between the price each customer actually pays and the maximum price they would have been willing to pay, all other things being equal.
C)The difference between the costs incurred in serving customers, and the revenue that they generate
D)The amount of extra product consumers buy because of the difference between the normal price and a special offer price.

Question 31

Industries such as pharmaceuticals earn very high returns on investment. Such industries:

A)Tend to be protected from competition by legal restrictions.
B)Can only maintain such high returns for short periods.
C)Always exist when intangible products are traded
D)Tend to have high entry barriers and differentiated products

Question 32

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

A)Incumbents will earn abnormal profit, and build entry barriers.
B)The government needs to make sure that competition will increase.
C)It is likely to attract the attention of firms looking to enter the industry, which may eventually lead to the return on capital falling.
D)It will attract firms outside the industry, but the incumbents will have erected entry barriers.

Question 33

"The market" and "the industry" are:

A)Related but not the same thing
B)Unrelated and different
C)Exactly the same concept, and can be used interchangeably
D)Exclusively used in marketing and strategic management respectively

Question 34

What is the relationship between macro level factors (such as economic trends or political trends) and strategy?

A)It's good to be aware of these factors, but they don't change your strategy
B)Strategy emerges from these factors
C)Strategy can be strongly affected by these factors, in terms of opportunities and threats
D)Macro level factors affect the industry environment.

Question 35

A barrier to entry is:

A)Anything that facilitates the entry of would-be new entrants in a specific industry
B)Capital requirements, cost advantages, and product differentiation
C)A law restricting trade.
D)Anything that makes entry into an industry as a new competitor more difficult, more costly, slower or even impossible.

Question 36

For a manufacturer access to distribution is a barrier to entry because:

A)New entrants face a disadvantage regarding retailers who are reluctant to carry their new products
B)Retailers have limited capacity of distribution to offer to new entrants
C)Retailers are risk-averse
D)Carrying new products induces fixed costs

Question 37

Once value is created, it is, in general:

A)Equally shared between customers and producers
B)Not equally shared between customers and producers
C)Distributed to the firm's shareholders
D)Reinvested into the firm or put aside as a reserve

Question 38

The basic premise of industry analysis is that:

A)Competition can be assessed between monopoly and perfect competition within the spectrum of industry structures
B)The level of profitability within an industry is largely determined by the dynamics of the industry structure
C)The internal variables of the firm determine a firm's performance within the industry
D)Porter's five forces are the determinants of industry intensity of competition

Question 39

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

A)Its relationships with customers, competitors, and suppliers
B)Its relationships with customers, rivals, government, and suppliers
C)Its relationships with its major stakeholders
D)Its vision and mission

Question 40

Value is created when:

A)The price that the customer is willing to pay for a product exceeds the firm's direct cost of production
B)The surplus of value is distributed between customers and producers in the industry by the forces of competition
C)The value of a product to consumers is more than they paid for it.
D)The price that the customer is willing to pay for a product exceeds the firm's cost.

Question 41

Concentration in an industry is frequently measured by the concentration ratio, which represents the combined market share of the top N players in the industry, where N must be specified.

Question 42

An industry's current profitability:

A)On its own tends to be a poor predictor of future profitability
B)Is an excellent predictor of its future profitability
C)Explains the past in that industry
D)Is determined by the forces of competition and so many other factors that gaining insights into its causes is almost impossible

Question 43

In a contestable market there does not always need to be actual competition to keep prices relatively low - just the threat of competitors entering the market.

Question 44

The relative bargaining power of buyers depends on:

A)All of the items below
B)The size and concentration of buyers relative to suppliers
C)A buyer's access to information about products and costs
D)The ability or threat to integrate vertically

Question 45

Economies of scale, absolute cost advantages, high capital start-up costs, and access to channels of distribution are all examples of "barriers to entry".

Question 46

Excess capacity often leads firms to cut prices to hold on to existing business for fear that competitors will do the same first, leaving them with a lower market share, and adverse average costs.

Question 47

For a specific product or service, the existence of close substitutes means that customers could switch to these substitutes if prices, service levels or other factors make it in their interests to do so.

Question 48

Changing the industry structure is:

A)Not really within the power of a single firm.
B)An endeavor that firms are undertaking on a permanent basis with great success
C)A risky strategic move that may backfire, because of retaliation from the industry's incumbents
D)Sometimes possible even by small firms, if the mix of drivers for change and existing structure make it susceptible to change

Question 49

Given the plethora of external influences, understanding the external environment requires managers to:

A)Use a framework or a system that allows them to organize information and rank factors
B)Monitor their rivals closely to detect signals of change in their strategies
C)Use all existing techniques to gather and analyze information
D)Work on the matter full-time

Question 50

Understanding the external environment of a firm requires one ultimately to identify:

A)The opportunities to make profit in the industry
B)The five forces identified by Porter's model
C)The barriers to entry and to exit in that industry
D)The expected level of profit in the mid.term for that industry

Question 51

Retaliation against a new entrant may take the form of aggressive price-cutting, increased advertising, sales promotion, or vexatious litigation.

Question 52

To forecast industry profitability consistently accurately, professional analysts have to:

A)Look at the link between performance and industry structure, then to identify major trends and to examine the link between these trends and the forces of competition
B)Look at the probability of new entries in the industry, to determine the major trends, and to forecast the probable overall industry profit
C)Determine the five larger players in the industry and their relative bargaining power in regards to their buyers and customers, and to identify their strengths and weaknesses Develop a deep understanding of how the industry creates value now and in the future, whether they use the tools described in the chapter or not.

Question 53

The overall bargaining power of buyers depends on:

A)The buyer's price sensitivity.
B)The intensity of rivalry among sellers and the willingness of the buyer to exploit this.
C)The buyer's price sensitivity and the relative bargaining power between the seller and the buyer
D)The intensity of rivalry among buyers and the ability to vertically integrate

Question 54

Regarding cost structures, having very high fixed costs means variable costs will be low so firms should be highly efficient.

Question 55

Understanding the competitive forces in an industry is:

A)A largely futile exercise for managers
B)Is of academic interest, but does not bring any value for strategic management
C)A way to enable managers to allocate their resources where competition is the strongest
D)A way to enable managers to position the firm where its particular capabilities can be deployed to best advantage

Question 56

To understand the environment, the starting point of the analysis is:

A)Classifying the environmental influences by source
B)Classifying the environmental influences by proximity
C)Both of the above
D)To identify the industry you are in; your customers, suppliers and competitors.

Question 57

Suppose that an industry's profitability is zero or negative overall;

A)Then all firms in the industry are performing badly
B)Then no firm in the industry can be performing well
C)Then the biggest firm in the industry is performing badly
D)Then even so it's entirely possible that some firms are making very good profits

Question 58

The bargaining power of one player in the industry relative to another player rests, ultimately, on the refusal to deal with the other player. The credibility and effectiveness with which each player can make this threat determines the balance of power

Question 59

One can view the connection between the general environment and the industry environment as:

A)The general environment is diffuse, whereas the industry environment consists of a small number of close competitors.
B)The industry environment consists of customers, suppliers, rivals, and new entrants, whereas the general environment comprises everything else.
C)The industry environment includes customers, competitors and suppliers, whereas the general environment matters to the extent that it affects the industry environment.
D)The critical influence of the industry environment on the wider social environment

Question 60

The bargaining power of suppliers is likely to be high:

A)When the suppliers' industry is concentrated
B)When suppliers are supplying differentiated products
C)When "our" (the customer's) industry is relatively fragmented
D)All of the above

Question 61

A Even pure monopolies have substitutes

Question 62

When a firm dominates a specific segment in an industry, it is well-placed to earn a higher level of profit than the average.

Question 63

Value is defined as the difference between the cost of supplying a product or service and the actual price paid by the customer for it, but not all value translates into profit.

Question 64

A key success factor is a factor determined from the external environment that a firm must satisfy in order to survive and prosper

Question 65

Understanding the structure of the industry helps managers to work out how to make a profit in future and to possibly identify ways to change the industry structure to their advantage.

Question 66

"Producer surplus" is an example of an "economic rent" - a payment above what is needed to develop the resource

Question 67

The level of profit in an industry is determined by three factors: the value of products to customers, the intensity of competition, and the relative bargaining power of producers and suppliers

Question 68

Formally scanning and analysing the external environment continuously is the best approach.

Question 69

There is no single absolute definition of what an "Industry" is

Question 70

Michael Porter's five sources model seeks to facilitate identifying and understanding industry structure

Question 71

To understand the effect of the external environment, one must be able to rank the factors in order of importance.

Question 72

Perfect competition defines an industry structure where two or three dominant firms efficiently supply the market.