Book 3_Equity_READING 46_INDUSTRY AND COMPETITIVE ANALYSIS

Question 1

Industry and competitive analysis involves five steps:

Answer 1

1. Define the industry
2. Survey the industry’s size, growth, profitability, and market share trends
3. Analyze the industry’s structure
4. Analyze external influences on the industry
5. Determine industry participants’ competitive strategies

Question 2

The three classification systems and their hierarchical structures (four or five tiers) are as follows:

Answer 2

• GICS: sector, industry groups, industries, subindustries
• ICB: industries, supersectors, sectors, subsectors
• TRBC: economic sectors, business sectors, industry groups, industries, activities

Question 3

Potential limitations of classification systems include

Answer 3

• inappropriate groupings,
• inaccurate classifications of companies selling multiple products,
• inability to deal with products and services offered in local or national markets only,
• and grouping changes over time.

Question 4

Industry size

Answer 4

the total annual sales of the product, which is not always the same as total annual sales of all the companies in the industry.

Question 5

Growth industries

Answer 5

those that have considerable growth potential, which is usually related to new technology

Question 6

Mature industries

Answer 6

have growth rates in line with the general economy or decreasing as the industry faces threats from substitute products

Question 7

Cyclical industries vs defensive industries

Answer 7

Cyclical industries involve sales of less essential items for consumers, while defensive industries involve sales of more essential items.

Question 8

Market share

Answer 8

is a company’s annual revenues as a percentage of the industry size.

Question 9

Industry concentration

Answer 9

• often expressed numerically using the HerfindahlHirschman Index
• The HHI is the sum of the squares of the market shares of all participants
  + less than 1,500 is considered to have low concentration;
  + between 1,500 and 2,500 is considered moderate concentration;
  + greater than 2,500 indicates high concentration.

Question 10

Porter’s five forces that determine industry competition are as follows:

Answer 10

1. Threat of new entrants
2. Threat of substitutes
3. Bargaining power of customers
4. Bargaining power of suppliers
5. Rivalry among existing competitors

Question 11

A PESTLE analysis consists of the following elements

Answer 11

1. Political influences
2. Economic influences
3. Social influences
4. Technology influences
5. Legal influences
6. Environmental influences

Question 12

cost leadership strategy

Answer 12

the firm seeks to have the lowest costs of production in its industry, offer the lowest prices, and generate enough volume to make a superior return.

Question 13

differentiation strategy

Answer 13

the firm’s products and services should be distinctive in terms of type, quality, or delivery.

Question 14

focus strategy

Answer 14

a niche market is targeted