Deck 3: Industry Analysis: the Fundamentals

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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.

Question 5

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 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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 13

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

Question 14

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

Question 15

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 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 socioeconomic system within which the firm must exist

Question 23

Parallel pricing-the tendency for companies in an industry to move prices more or less simultaneously-is typically an indicator of:

A)Healthy price competition
B)The sensitivity of the firms in an industry to the unpopularity of price increases
C)Lack of product differentiation
D)The desire of oligopolists to avoid price competition

Question 24

Economic value is created when:

A)The price that the customer is willing to pay for a product exceeds the costs of the material inputs used to produce the product
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 exceeds the price they paid for it
D)The price that the customer is willing to pay for a product exceeds the cost of supplying it

Question 25

The American Medical Association encourages limits on the number of medical school places for training new doctors:

A)To ensure a high standard of applicant
B)To keep class sizes small
C)To keep doctors' remuneration high
D)To ensure that only the best universities have medical schools

Question 26

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 27

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

A)The overall state of the economy and the intensity of competition 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 for customers,the intensity of competition,and the relative bargaining powers of producers,their suppliers and their buyers

Question 28

The mergers and acquisitions that have increased seller concentration in the US and European airline industries 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 29

The basic premise of industry analysis is that:

A)Perfect competition and monopoly are the basic models,most industries lie between these two extremes
B)The level of profitability within an industry is determined by the systematic influence of the industry structure which determines the intensity of competition in the industry
C)Industry profitability depends upon the interaction among competing firms
D)Technology and consumer demand are the basic forces that shape industry structure

Question 30

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 31

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

A)Use a framework or a system that allows them to organize relevant information and rank the importance of different factors
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 32

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 33

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 34

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

Question 35

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 36

Which of the following does not contribute to 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 37

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 38

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 39

If the Android operating system becomes the dominant platform for cell phones,its effect will be to boost the profitability of the handset industry because it is available free of charge to the handset makers.

Question 40

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 41

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 since changes in industries' profitability occur slowly
C)Is the result of many different factors interacting in unpredictable ways
D)Is largely set by the profitability of the biggest company within that industry

Question 42

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 43

The suppliers of agricultural products tend to lack bargaining power relative to buyers because:

A)Farmers tend to be uneducated
B)The farming industry tends to be fragmented and supply commodity products
C)Agricultural products are essential food products that must be kept at affordable prices
D)Most farmers are not forward integrated

Question 44

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 45

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 46

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 47

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

A)A matter of the personal preferences 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 48

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 49

Legal requirements that banks,providers of wireless telecommunication services,and taxis must obtain a government issued license before going into business impact the profitability of their respective industries:

A)Negatively because governments charge high fees for such licenses
B)Positively because they restrict entry to the industry
C)Negatively because such licensing is usually accompanied by regulation of prices
D)Positively if such licenses can be sold on a secondary market

Question 50

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 51

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)Price homogeneity-within the confines of a market,a single price rules
D)Substitutability on both the demand side and the supply side