Chapter 2

Question 1

Industry profitability is a function of:

A. The previous price that customers have paid for a product or service.
B. The lowest price that customers will pay for a product or service.
C. The highest price that customers will pay for a product or service.
D. The average price that customers pay for a product or service.

Answer 1

C

Question 2

Which of the following is not a potential source of competition in an industry?

A. The threat of substitute products or services.
B. The threat of entry of new firms.
C. The threat of exit between existing firms.
D. Rivalry between existing firms.

Answer 2

C

Question 3

In what circumstance would a firm expect to earn monopoly profits?

A. When the firm undercuts its competitors in prices.
B. When there is a state of perfect competition.
C. When prices are equal to marginal costs.
D. None of these choices.

Answer 3

D

Question 4

Which of the following industry factors does not affect the nature of rivalry among existing firms?

A. Concentration of competitors.
B. Legal barriers.
C. Industry growth rate.
D. Ratio of fixed to variable costs.

Answer 4

B

Question 5

Which of the following would not affect the threat of new firms entering an industry?

A. Legal barriers.
B. First-mover advantage.
C. Economies of scale.
D. Concentration of competitors.

Answer 5

D

Question 6

A patent would be an example of a:

A. Legal barrier.
B. First-mover advantage.
C. Economies of scale.
D. None of these choices.

Answer 6

A

Question 7

Two reasons why substitute products may be a threat are:

A. They have the same form as existing products and are more expensive than a similar product.
B. They perform the same function as existing products and do this for a similar price.
C. They perform a different function from existing products and do this for a lower price.
D. None of these choices.

Answer 7

B

Question 8

Which of the following industry factors does not affect the bargaining power of buyers?

A. How many alternative products a buyer can choose from.
B. Concentration of buyers relative to the concentration of sellers.
C. Price sensitivity of customers.
D. Economies of scale.

Answer 8

D

Question 9

A buyer would be more sensitive to price when:

A. None of these choices.
B. They consume more of a product.
C. There are many switching costs.
D. There are few switching costs.

Answer 9

D

Question 10

A supplier can expect to have more bargaining power when:

A. The product or service is critical to the business of the buyer.
B. There are only a few suppliers in the industry.
C. There are few substitute products available to buyers.
D. All of these choices.

Answer 10

D

Question 11

A potential limitation when evaluating industries is that:

A. Most industries are very competitive
B. Industries may not always have clear boundaries.
C. Some industries have few competitors.
D. An industry may be comprised of firms that are listed and unlisted.

Answer 11

B

Question 12

Which of the following factors might an analyst not consider when identifying potential competitors?

A. Being similar in size to the firm being analysed.
B. Operating in the same country.
C. Operating in the same industry.
D. Having a different range of activities.

Answer 12

D

Question 13

Cost leadership is one way a firm can build a competitive advantage. Another option is:

A. Differentiation.
B. Industry leadership.
C. Economies of scale.
D. None of these choices.

Answer 13

A

Question 14

Which of the following best describes how a firm earns above-average profitability if it attains cost leadership?

A. Producing more goods and services.
B. Designing new products.
C. Increasing its level of advertising.
D. Charging the same price as its competitors.

Answer 14

D

Question 15

If a firm is considering a differentiation strategy, which of the following should it be focusing on?

A. Costs.
B. How to meet the needs of consumers in a unique manner.
C. Determining what consumers value in a product or service.
D. All of these choices.

Answer 15

D

Question 16

The set of activities a firm performs where it converts inputs into outputs is an example of:

A. A value chain.
B. Core competencies.
C. A supply chain.
D. A production line.

Answer 16

A

Question 17

If a firm loses its competitive advantage due to a change in the environment, which of the following is least likely to have occurred?

A. New technologies have emerged.
B. Consumer requirements have changed.
C. They have purchased patents.
D. There has been a change in regulation.

Answer 17

C

Question 18

Corporate social responsibility can produce value for a business because:

A. It can attract and retain higher quality employees.
B. It potentially reduces future litigation costs.
C. It can drive innovation and creativity.
D. All of these choices.

Answer 18

D

Question 19

When analysing a firm that is a multi-business organisation, when should an analyst consider the economic consequences of managing different business units within the one firm?

A. When the firm is listed on the stock exchange.
B. Always.
C. When there is substantial competition on at least one of the business units.
D. Only if there are more than three business segments.

Answer 19

B

Question 20

Which of the following best describes the implications of transaction cost economics?

A. The multi-product firm is an efficient choice of organisation form when coordination among independent, focused firms is costly because of market transaction costs.
B. The multi-product firm is an inefficient choice of organisation form when coordination among independent, focused firms is costly because of market transaction costs.
C. The multi-product firm is an efficient choice of organisation form when coordination among independent, focused firms is costly because of product transaction costs.
D. None of these choices.

Answer 20

A

Question 21

Which of the following would not give rise to transaction costs?

A. Market imperfections such as incentive problems.
B. Producing products that do not require significant human capital skills.
C. Producing products that require proprietary technology.
D. Market imperfections such as information problems.

Answer 21

B

Question 22

Multi-business companies can experience a diversification discount as:

A. They suffer from incentive misalignment problems.
B. The decision to diversify is due to a desire to maximise the size of the company instead of increasing shareholder value.
C. It is difficult to value and monitor and value multi-business companies.
D. All of these choices.

Answer 22

D

Question 23

Defining an industry in a way that is inappropriate can lead to:

A. Incomplete evaluation.
B. Both incomplete evaluation and inaccurate forecasts.
C. Inaccurate forecasts.
D. More accurate forecasts.

Answer 23

B

Question 24

A company that experiments with different product designs with the sole intention of lower manufacturing costs is likely engaging in which strategy?

A. Cost leadership.
B. Product differentiation.
C. Both cost leadership and differentiation.
D. Cost differentiation.

Answer 24

A

Question 25

Firms that straddle both cost leadership and differentiation strategies are likely to:

A. Not be competitive.
B. Not be very profitable.
C. Have lower priced products.
D. Have a wide variety of products.

Answer 25

B

Question 26

Identify three aspects you would look for in a potential competitor.

Answer 26

• A listed firm in the same country.
• A firm in the same industry.
• A firm with a similar range of activities.
• A firm that is similar in size.
• Similar economic drivers that impact the business.
• Comparable profile or type of customers.
• Similar level of diversification across different industries.
• Level or proportion of leverage (borrowing).
• Similar profile of employees or suppliers.
• Similar regulations.
• Similar needs related to location such as weather or transportation.

Question 27

List three ways in which corporate social responsibility could create business value.

Answer 27

• Having access to a wider source of funding by attracting investors who are conscientious about the environment.
• Reducing or mitigating the future risk of litigation, regulations, and penalties.
• CSR encourages firms to be more innovative in how they operate and design processes.
• Boosting employee and customer morale. This could foster loyalty and pride in products and services.
• It may win awards or be made an employer of choice, which could help the firm to attract higher quality employees.

Question 28

Describe one scenario where the diversification discount may be applied. For this scenario, provide an explanation for why this could occur.

Answer 28

For the scenario:
* Diversified companies trade at a discount in the share market relative to a comparable portfolio of companies that focus in one area or industry.
* The acquisition of one company by another fails to create value for the acquiring company.
* Value is created when companies with multiple business units increase their corporate focus through divisional spin-offs and asset sales.

For a potential explanation:
* Management decisions to diversify or expand are driven by the desire to maximise the size of the company instead of increasing shareholder wealth.
* Companies that are diversified can suffer from incentive misalignment problems, which leads to sub-optimal investment decisions and poor operating performance.
* It may be difficult for capital market participants to monitor and value multi-business companies due to inadequate disclosure on the performance of specific business units.