Chapter 2

Question 1

Industry

Answer 1

a group of companies that produce

competing products or services

Question 2

Critical Success Factors

Answer 2

elements of the strategy that are promote (but do

not guarantee) success within a given industry.

Question 3

Primary vs secondary industry

Answer 3

A primary industry consists of a firm’s most direct
competitors. A secondary industry also includes
less direct rivals.

Question 4

Ways of determining an industry

Answer 4

old SIC system and its successor, the NAICS,
can be used as a starting point. Outside sources
can help define an industry, but top managers must
make their own determination.

Question 5

Market Share

Answer 5

represents the proportion
of industry sales attributed to a particular
rival.

Question 6

Relative Market Share

Answer 6

When data is not readily available or a
firm wishes to focus on only a subset of
the industry, relative market share—
the firm’s percentage of sales in an
“industry” restricted to select
competitors—is a useful measure.

Question 7

Industry Life Cycle Stages

Answer 7

Introduction, Growth, Shakeout, Maturity, Decline

Question 8

Shakeout

Answer 8

Shakeout occurs when industry growth is no longer rapid enough to support the increasing number of competitors. As a result, a firm’s growth is contingent on its resources and competitive positioning instead of a high growth rate within the industry.

Question 9

Maturity

Answer 9

Maturity is reached when the market demand for the industry’s outputs is becoming saturated. Virtually all purchases are upgrades or replacements, and industry growth may be low, nonexistent, or even negative.

Question 10

Decline stage and growth

Answer 10

Growth is difficult to achieve when an industry is in decline.

Question 11

Hypercompetition

Answer 11

industries emerge, develop, and evolve so rapidly that attempting to remain in the current stage may be neither possible nor worthwhile.

Question 12

Porter’s 5 Forces

Answer 12

1. The intensity of rivalry among incumbent firms (middle)
2. The threat of new competitors entering the industry (up down)
3. The threat of substitute products or services (up down)
4. The bargaining power of buyers (left right)
5. The bargaining power of suppliers (left right)

Question 13

Essentials of Porter’s 5 forces

Answer 13

Collectively, the five forces determine an
industry’s potential for profitability. However,
forces do not guarantee that an individual
firm will be profitable or unprofitable. Ideally, firms should seek to compete in industries with a high potential for profitability.

Question 14

Intensity of Rivalry Factors

Answer 14

1. Concentration of Competitors
2. High Fixed or Storage Costs
3. Slow Industry Growth
4. Lack of Differentiation or Low Switching Costs
5. Capacity Augmented in Large Increments
6. Diversity of Competitors
7. High Strategic Stakes
8. High Exit Barriers

Colins High Sloths Switch Caps During Happy Holidays

Question 15

Threat of Entry

Answer 15

New entrants threaten the hold existing firms have on an industry and thereby tend to lower profits. The likelihood that prospective competitors will join an industry depends on barriers to entry. Firms often erect entry barriers to keep potential competitors out of the industry.

Question 16

Threat of Entry Factors

Answer 16

1. Economies of Scale
2. Brand Identity and Product Differentiation
3. Capital Requirements
4. Switching Costs
5. Access to Distribution Channels
6. Cost Advantages Independent of Size
7. Government Policy

Eve Brands Caps, Switches, And, Costly Goods

Question 17

Pressure from Substitute Products

Answer 17

Substitute products come from outside of the industry, not from competitors. Substitutes present acceptable alternatives in some cases, but not others.

Question 18

Buyers have bargaining power when

Answer 18

1. Buyers are concentrated, or each one purchases a significant percentage of total industry sales.
2. The products that the buyers purchase represent a significant percentage of the buyers’ costs.
3. The products that the buyers purchase are standard or undifferentiated.
4. Buyers face few switching costs and can freely switch from one rival to another.
5. Buyers earn low profits, creating pressure for them to reduce their purchasing costs and negotiate more aggressively with industry firms.
6. Buyers can engage in backward integration by becoming their own suppliers.
7. The industry’s product is relatively unaffected by the quality of the buyers’ products or services, thereby creating an incentive for firms to change suppliers and demand the lowest prices.
8. Buyers have access to the same product, market, and cost information as producers in the industry.

Colin’s significant standard switches lose by unrated icecream

Question 19

Suppliers have bargaining power when

Answer 19

1. The supplying industry is dominated by one or a few companies.
2. There are no substitute products, weakening an industry’s rivals in relation to their suppliers.
3. The industry as a whole is not a major customer of the suppliers.
4. The suppliers pose a credible threat of forward integration by “becoming their own customers.”
5. The suppliers’ products are differentiated or have built-in switching costs, thereby reducing the buyers’ ability to play one supplier against another.

Question 20

Limitations of Porter’s 5 forces model

Answer 20

Assumes a clear, recognizable industry and
does not consider partner firms.
Assumes that large firms cannot influence
the industry structure.
Assumes industry factors, not firm
resources, are primary profit drivers.
Difficult to apply to firms operating in
multiple countries where industry
environments vary considerably.

Question 21

Case Analysis Steps

Answer 21

2. Identify industry and competitors
3. Potential Profitability of the Industry
4. Industry successes and failures