Question 1

Switching costs for an end user are likely to be much higher because of the Internet.

Accepted Answer

Switching costs for an end user are also potentially much lower because of the Internet. Switching may involve only a few clicks of the mouse to find and view a competing product or service online.

Question 2

Apple used complementors to gain market share in the digital music business.

Accepted Answer

The Apple company foray into music has been tremendously successful. Since the introduction in 2001 of the iPod, Apple has sold over 300 million iPod units worldwide. iTunes software and services are still going strong, increasing to 16 billion USD in 2013, which represented a 71 percent increase over 2011.

Question 3

The more attractive the price/performance ratio of substitute products, the tighter it constrains the ability of an industry to charge high prices.

Accepted Answer

Substitutes limit the potential returns of an industry by placing a ceiling on the prices that firms in that industry can charge profitably. The more attractive the price/performance ratio of substitute products, the tighter the lid will be on the profits of that industry.

Question 4

Rivalry is most intense when there are high exit barriers and high industry growth.

Accepted Answer

Intense rivalry is the result of several interacting factors including: numerous or equally balanced competitors, slow industry growth, high fixed or storage costs, lack of differentiation or switching costs, capacity augmented in large increments, and high exit barriers.

Question 5

The use of the strategic group concept is generally not helpful in charting the future directions of the strategies of a firm.

Accepted Answer

Strategic groupings help chart the future directions of the strategies of a firm. Arrows emanating from each strategic group can represent the direction in which the group (or a firm within the group) seems to be moving. If all strategic groups are moving in a similar direction, this could indicate a high degree of future volatility and intensity of competition.

Question 6

Rivalry will be most intense when there is a lack of differentiation or switching costs.

Accepted Answer

Where the product or service is perceived as a commodity or near commodity, the buyer's choice is typically based on price and service, resulting in pressures for intense price and service competition. Lack of switching costs has the same effect.

Question 7

Five-forces analysis implicitly assumes a zero-sum game, a perspective that can be short-sighted.

Accepted Answer

Five-forces analysis implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces. Yet such an approach can often be short-sighted. It can overlook the many potential benefits of developing constructive win-win relationships with suppliers and customers.

Question 8

Rivalry is not always cutthroat; sometimes, it can be gentlemanly.

Accepted Answer

Rivalry, of course, differs across industries. In some instances it is characterized as warlike, bitter, or cutthroat, whereas in other industries it is referred to as polite and gentlemanly.

Question 9

The Internet and digital technologies suppress the bargaining power of buyers by providing them with more information to make buying decisions.

Accepted Answer

The Internet and wireless technologies may increase buyer power by providing consumers with more information to make buying decisions and by lowering switching costs.

Question 10

Because of the Internet and digital technologies, it is very difficult for suppliers to create purchasing techniques that lower switching costs.

Accepted Answer

Suppliers may be able to create Web-based purchasing arrangements that make purchasing easier and discourage their customers from switching.

Question 11

Reintermediation is responsible for an overall reduction in business opportunities.

Accepted Answer

Just as the Internet is eliminating some business functions, it is creating an opening for new functions. These new activities are entering the value chain by a process known as reintermediation.

Question 12

The same environmental trend or event may have a very different impact on different strategic groups within the same industry.

Accepted Answer

Strategic groups are helpful in thinking through the implications of each industry trend for the strategic group as a whole. Such analysis can help in making predictions about industry evolution. A sharp increase in interest rates, for example, tends to have less impact on providers of higher-priced goods (e.g., Porsches) than on providers of lower-priced goods (e.g., Chevrolet Cobalt) whose customer base is much more price sensitive.

Question 13

In conducting a good industry analysis that will yield an improved understanding of the root causes of profitability, rigorous quantification of the five forces is not necessary.

Accepted Answer

Michael Porter addresses two critical issues in conducting a good industry analysis, which will yield an improved understanding of the root causes of profitability: (1) choosing the appropriate time frame and (2) a rigorous quantification of the five forces.

Question 14

Establishing long-term mutually beneficial relationships with suppliers improves the company ability to implement just-in-time (JIT) inventory systems, which let it manage inventories better and respond quickly to market demands.

Accepted Answer

Five-forces analysis implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces. Yet such an approach can often be shortsighted; it can overlook the many potential benefits of developing constructive win-win relationships with suppliers and customers. Establishing long-term mutually beneficial relationships with suppliers improves the company ability to implement just-in-time (JIT) inventory systems, which let it manage inventories better and respond quickly to market demands.

Question 15

Complement products typically have no impact on the value of products and services of the firm.

Accepted Answer

Complements typically are products or services that have a potential impact on the value of products or services of the firm. Powerful hardware is of no value to a user, unless there is software that runs on it.

Question 16

The Internet heightens the threat of substitutes because it creates new ways to accomplish the same task.

Accepted Answer

Along with traditional marketplaces, the Internet has created a new marketplace and channel. In general, the threat of substitutes is heightened, because the Internet introduces new ways to accomplish the same tasks.

Question 17

Competition tends to be more intense among firms within a strategic group than between strategic groups.

Accepted Answer

Strategic groups are clusters of firms that share similar strategies. Rivalry tends to be greater among firms that are alike.

Question 18

In most industries, new entrants will not be a threat because the Internet lowers entry barriers.

Accepted Answer

In most industries, the threat of new entrants has increased because digital and Internet-based technologies lower barriers to entry. For example, businesses that reach customers primarily through the Internet may enjoy savings on other traditional expenses such as office rent, sales-force salaries, printing, and postage. This may encourage more entrants who, because of the lower start-up expenses, see an opportunity to capture market share by offering a product or performing a service more efficiently than existing competitors. Thus, a new cyber entrant can use the savings provided by the Internet to charge lower prices and compete on price despite the incumbent's scale advantages.

Question 19

Michael Porter's five-forces Analysis is a dynamic tool for analyzing industry attractiveness.

Accepted Answer

The five-forces analysis also has been criticized for being essentially a static analysis. External forces as well as strategies of individual firms are continually changing the structure of all industries.

Question 20

The Nintendo success story in the early 1990s was a result of its ability to manage its relationship with its complementors, such as the licensee rights given to outside firms to develop games using the Nintendo game console.

Accepted Answer

The Nintendo success story in the early 1990s was a result of its ability to manage its relationship with its complementors. Nintendo built a security chip into the hardware and then licensed the right to develop games to outside firms. These firms paid a royalty to Nintendo for each copy of the game sold. The royalty revenue enabled Nintendo to sell game consoles at close to their cost, thereby increasing their market share, which, in turn, caused more games to be sold and more royalties to be generated.

Quiz 2: Analyzing the External Environment of the Firm: Creating Competitive Advantages