Ch2. Industry Analysis

Question 1

The business environment of a firm consists of all the internal and external influences that affect its performance.
a. true
b. false

Answer 1

b. false
p. 42-45
The business environment of a firm consists of all the external influences that affect its decisions and performance.

Question 2

PEST analysis is a popular environmental scanning framework.
a. true
b. false

Answer 2

a. true
p. 42-45

Question 3

Value is created when the price the customer is willing to pay for a product exceeds the costs incurred by the firm in supplying the product.
a. true
b. false

Answer 3

a. true
p. 45

Question 4

Value creation translates directly into profit
a. true
b. false

Answer 4

b. false
p. 45
Value is created when the price the customer is willing to pay for a product exceeds the costs incurred by the firm.
But value creation does not translate directly into profit. The surplus of value over cost is
distributed between customers and producers by the forces of competition.

Question 5

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.
a. true
b. false

Answer 5

a. true
p. 45
The profits earned by the firms in an industry are determined by three factors:
- the value of the product to customers;
- the intensity of competition;
- the bargaining power of the producers relative to their suppliers

Question 6

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

Answer 6

a. true
p. 47

Question 7

We analyse industry structure because this helps us explain variations in the profitability of different industries.
a. true
b. false

Answer 7

a. true
p. 47-57

Question 8

Michael Porter’s five forces model is a framework for analysing the factors that determine a firm’s competitive strategy.
a. true
b. false

Answer 8

b. false
p. 48
Michael Porter’s five forces framework views the profitability of an industry (as indicated by its rate of return on capital relative to its cost of capital) as determined by five sources of competitive pressure. It is a helpful, widely used framework for classifying and analysing the factors that determine the intensity of competition and levels of competition in different industries.

Question 9

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.
a. true
b. false

Answer 9

a. true
p. 48-49

Question 10

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.
a. true
b. false

Answer 10

a. true
p. 48-49

Question 11

Economies of scale, absolute cost advantages, high capital start-up costs, and access to channels of distribution are all examples of “barriers to entry”.
a. true
b. false

Answer 11

a. true
p. 49-52

Question 12

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

Answer 12

a. true
p. 49-52

Question 13

A high ‘Concentration Ratio’ is typical of oligopolistic industries, dominated by a few large players.
a. true
b. false

Answer 13

a. true
p. 52-54

Question 14

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.
a. true
b. false

Answer 14

a. true
p. 52-54

Question 15

Having high fixed costs makes it hard to make a profit in a recession, so is indicative of poor cost-control.
a. true
b. false

Answer 15

b. false
p. 52-54
When excess capacity causes price competition, how low will prices go? The key factor is cost structure. Where fixed costs are high relative to variable costs, firms will take on marginal business at any price that covers variable costs. The consequences for profitability can be disastrous. In the airline industry, the emergence of excess capacity almost invariably leads to price wars and industry‐wide losses. The willingness of airlines to offer heavily discounted tickets on flights with low bookings reflects the very low variable costs of filling empty seats. During periods of recession the industries that have suffered the most drastic falls in profitability (cars, mining, hotels) have tended to be those where fixed costs were high and firms were willing to accept additional business at any price that covered variable costs.

Question 16

The bargaining power of one player in the industry relative to another player rests, ultimately, on refusal to deal with the other player.
a. true
b. false

Answer 16

a. true
p. 55
Bargaining power rests, ultimately, on refusal to deal with the other party. The balance of power between the two parties to a transaction depends on the credibility and effectiveness with which each makes this threat.

Question 17

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

Answer 17

a. true
p. 57-61

Question 18

There is no single absolute definition of what an “Industry” is.
a. true
b. false

Answer 18

a. true
p. 62-63

Question 19

Porter’s 5 Forces model arguably has some deficiencies and does not answer all possible questions. But this is true of all models.
a. true
b. false

Answer 19

a. true
p. 64-65

Question 20

Key success factors are defined by the market and by customers, not by the company.
a. true
b. false

Answer 20

a. true
p. 68-69

Question 21

Which of the following is a framework for categorising key elements of an organization’s external environment?

a. SWOT
b. PESTEL
c. The BCG matrix
d. Porter’s value chain

Answer 21

b. PESTEL
p. 42-43

Question 22

Systematic, continual scanning of a wide range of external influences would appear desirable but:

a. merely listing a large number of external factors is rarely helpful
b. environmental analysis can be expensive to undertake
c. extensive scanning can result in information overload
d. all of the above

Answer 22

d. all of the above
p. 42-45

Question 23

The starting point for industry analysis is:

a. Classifying the environmental influences by source
b. Classifying the environmental influences by proximity
c. understanding the value of the product to customers and suppliers
d. understanding the value of the product to customers, the intensity of competition and the bargaining power of producers relative to their suppliers

Answer 23

d. understanding the value of the product to customers, the intensity of competition and the bargaining power of producers relative to their suppliers
p. 42-45

First, for a firm to make a profit it must create value for customers. Hence, it must understand its customers. Second, in creating value, the firm acquires goods and services from suppliers. Hence, it must understand its suppliers and manage relationships with them. Third, the ability to generate profit depends on the intensity of competition among firms that compete for the same value‐creating opportunities. Hence, the firm must understand competition. Thus, the core of the firm’s business environment is formed by its relationships with three sets of players: customers, suppliers and competitors. This is its industry environment.

Question 24

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

Answer 24

c. The industry environment includes customers, competitors and suppliers, whereas the general environment matters to the extent that it affects the industry environment
p. 42-45

Question 25

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

a. Its relationships with customers, competitors, and suppliers
b. Its relationships with key pressure groups and shareholders
c. Its relationships with its major stakeholders
d. Its vision and mission

Answer 25

a. Its relationships with customers, competitors, and suppliers
p. 45

Question 26

If top management understands customers, suppliers, competitors and the general environment then:

a. the company will be successful
b. a successful strategy will emerge from these factors
c. they are able to evaluate industry attractiveness
d. they can predict the success of their company

Answer 26

c. they are able to evaluate industry attractiveness
p. 42-45

Question 27

Value is created when:

a. The price that the customer is willing to pay for a product exceeds the price the customer is actually charged
b. Competition ensures that no firm can make above average profit
c. Surpluses are appropriated by suppliers
d. The price that the customer is willing to pay for a product exceeds the firm’s cost

Answer 27

d. The price that the customer is willing to pay for a product exceeds the firm’s cost
p. 42-45

Question 28

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

Answer 28

b. Not equally shared between customers and producers
p. 42-45
Value is created when the price the customer is willing to pay for a product exceeds the costs incurred by the firm. But value creation does not translate directly into profit. The surplus of value over cost is distributed between customers and producers by the forces of competition. The stronger the competition among producers, the more of the surplus is received by customers and the less of the surplus is received by producers.

Question 29

In Porter’s five forces framework, the term “industry attractiveness” refers to:

a. the appeal of the industry to a particular firm
b. overall industry profitability
c. the extent to which the industry draws in new entrants
d. the potential for one firm to dominate the industry

Answer 29

b. overall industry profitability
p. 45-47

Question 30

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

a. The overall economic situation, and the intensity of rivalry between established firms
b. The degree of concentration of the industry and the availability of substitutes
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

Answer 30

d. The value of the product for customers, the intensity of competition, and the relative bargaining powers of producers, their suppliers and their buyers
p. 47-57

Question 31

The basic premise of industry analysis is that:

a. Competition depends, primarily, on the number of firms within an industry
b. The level of profitability within an industry is largely determined by the industry structure
c. The internal variables of the firm determine a firm’s performance within the industry
d. Profits are squeezed by powerful suppliers

Answer 31

b. The level of profitability within an industry is largely determined by the industry structure
p. 47-57

Question 32

Porter’s 5 Forces model is intended to be:

a. Used as an alternative to the earlier PEST model
b. Used primarily as an academic tool
c. Used in conjunction with PEST and other models
d. Used to analyse industries in the 1980’s and 1990’s

Answer 32

c. Used in conjunction with PEST and other models
p. 47-57

Question 33

The idea with Porter’s 5 Forces is to:

a. Quantify the 5 forces, to produce ideally a mathematical model of the industry
b. Identify which forces are relatively more powerful, and to assess their impact on competition and industry profitability
c. Work out how management can eliminate each of the competitive forces
d. Use it to construct a plan to achieve monopoly power

Answer 33

b. Identify which forces are relatively more powerful, and to assess their impact on competition and industry profitability
p. 57-61

Question 34

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

Answer 34

d. Anything that makes entry into an industry as a new competitor more difficult, more costly, slower or even impossible
p. 49-52

Question 35

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 will intervene 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

Answer 35

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
p. 49-52

Question 36

Industries such as pharmaceuticals have typically earned high returns on investment because they

a. have tended to be protected from competition by legal restrictions
b. have spent large sums on research and development
c. have tended to have high entry barriers and differentiated products
d. both a and c

Answer 36

d. both a and c
p. 49-52

Question 37

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 yet understand the scale economies so they cannot precisely determine their selling price
c. New entrants face a risk of price retaliation from the incumbents which could occur immediately on a large scale
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

Answer 37

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
p. 49-52

Question 38

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

a. New entrants face a disadvantage from 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

Answer 38

a. New entrants face a disadvantage from retailers who are reluctant to carry their new products
p. 49-52

Question 39

Barriers to entry are effective:

a. Yes, because long-term empirical evidence shows that industries with high barriers to entry exhibit higher returns on investment on average
b. Yes, because once established they are irreversible
c. No, because firms can overcome these barriers by modifying their strategies
d. No, because higher returns attract more new entrants who want to benefit from higher returns than in non-protected industries

Answer 39

a. Yes, because long-term empirical evidence shows that industries with high barriers to entry exhibit higher returns on investment on average
p. 49-52

Question 40

Barriers to exit are:

a. The non-recoverable 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

Answer 40

a. The non-recoverable costs of quitting or scaling down capacity in an industry
p. 52-54

Question 41

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

a. The labour market and the output market
b. As a buyer in the market for inputs, and as a seller in the output market
c. The labour market and the input markets
d. The product market divided in two or more segments (such as mid-size car and SUV market segments)

Answer 41

b. As a buyer in the market for inputs, and as a seller in the output market
p. 54-55

Question 42

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

Answer 42

c. The buyer’s price sensitivity and the relative bargaining power between the seller and the buyer
p. 54-55

Question 43

Bargaining power rests, ultimately, on:

a. The negotiating skills of the buyer versus the seller
b. Historic and accidental events
c. The respective effectiveness and cohesion of top management teams
d. The perceived or real threat for one party to refuse to deal with the other party

Answer 43

d. The perceived or real threat for one party to refuse to deal with the other party
p. 54-55

Question 44

The relative bargaining power of buyers depends on:

a. The size and concentration of buyers relative to suppliers
b. A buyer’s access to information about products and costs
c. The ability or threat to integrate vertically
d. All of the above

Answer 44

d. All of the above
p. 54-55

Question 45

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 the industry with which suppliers are transacting is relatively fragmented
d. All of the above

Answer 45

d. All of the above
p. 54-55

Question 46

Which of the following changes in industry structure are likely to improve industry attractiveness:

a. a change in consumer buying patterns that favours substitute products
b. a wave of new entrants joining the industry
c. industry consolidation through mergers and takeovers
d. a and b

Answer 46

c. industry consolidation through mergers and takeovers

Question 47

47. To forecast industry profitability consistently and 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 largest players in the industry and their relative bargaining power in regards to their buyers and customers, and to identify their strengths and weaknesses
d. Develop a deep understanding of how the industry creates value now and in the future, whether or not they use the tools described in chapter 2.

Answer 47

d. Develop a deep understanding of how the industry creates value now and in the future, whether or not they use the tools described in chapter 2.
p. 58

Question 48

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

Answer 48

a. On its own tends to be a poor predictor of future profitability
p. 58

Question 49

Changing the industry structure is:

a. Not really within the power of a single firm
b. An endeavour 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

Answer 49

d. Sometimes possible even by small firms, if the mix of drivers for change and existing structure make it susceptible to change
p. 60-61

Question 50

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

Answer 50

d. A way to enable managers to position the firm where its particular capabilities can be deployed to best advantage

Question 51

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

Answer 51

d. Then even so it’s entirely possible that some firms are making very good profits

Question 52

“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

Answer 52

a. Related but not the same thing

Question 53

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

Answer 53

c. Somewhat flexible in scope depending on what aspect of business you are considering

Question 54

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 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

Answer 54

d. Substitutability on both the demand side and the supply side, combined with an element of judgment depending on context and purpose

Question 55

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

Answer 55

c. Largely a matter of judgment and experience contingent on the purpose of the analysis

Question 56

A 6th force - Complements - should arguably be added to Porter’s 5 Forces Model because:

a. Porter’s original analysis was inadequate
b. It’s clear that since Porter devised his model, complementors have become more important
c. Porter’s model was developed over 30 years ago, so it’s old-fashioned
d. Answers b and c

Answer 56

b. It’s clear that since Porter devised his model, complementors have become more important

Question 57

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

a. What do customers want which we could supply profitably 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. How should managers analyse information collected from the market and what should they do about it?

Answer 57

a. What do customers want which we could supply profitably and what should the firm do to survive competition?

Question 58

The question “What do customers want?”:

a. Is not relevant because customers will show their preferences through their behaviour
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 outsourced to a Market Research company
d. Is best answered by ensuring that certain managers are educated in Marketing

Answer 58

b. Must be asked by managers, and an accurate answer obtained and understood, since it’s the driving force behind generating profit

Question 59

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

a. Can be addressed through 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

Answer 59

c. Requires an understanding of the current and future basis of competition specific to the industry

Question 60

The value to managers of understanding key success factors is:

a. Self-evident
b. Legitimate because it is accepted by the academic world
c. That it generates “generic strategies” which guarantee success
d. To help maintain a strategic perspective of what needs to be done to survive, and help them avoid degenerating into a fire fighting approach

Answer 60

d. To help maintain a strategic perspective of what needs to be done to survive, and help them avoid degenerating into a fire fighting approach

Question 61

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

Answer 61

a. The opportunities to make profit in the industry

Question 62

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

Answer 62

a. Use a framework or a system that allows them to organize information and rank factors

Question 63

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 a and b
d. To identify the industry you are in; your customers, suppliers and competitors

Answer 63

d. To identify the industry you are in; your customers, suppliers and competitors

Question 64

“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

Answer 64

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

Question 65

The analytical tools described in the text:
a. Must be used if one is to understand the industry structure
b. Are simply that; just tools. Their value depends on the skill with which they are deployed
c. Should really only be used by academics
d. Both a and c

Answer 65

b. Are simply that; just tools. Their value depends on the skill with which they are deployedf

Question 66

Porter’s 5 Forces model was based on a static, stable view of industry which ignores dynamic forces:
a. Because industries in Porter’s day were not very dynamic
b. Which can easily be dealt with by taking a dynamic perspective of the forces e.g. Innovation is a consequence of Rivalry
c. And so has outlived its usefulness, and should be replaced with something more up to date
d. Which was Porter’s intention, because you have to “walk before you can run”

Answer 66

b. Which can easily be dealt with by taking a dynamic perspective of the forces e.g. Innovation is a consequence of Rivalry