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EQUITY_CFA1 > CHAPTER 6: Industry & Competitive Analysis > Flashcards

CHAPTER 6: Industry & Competitive Analysis Flashcards

1
Q

USES OF INDUSTRY ANALYSIS

A
  1. Understanding a company’s business & business environment
  2. Identifying Active Equity Investment Opportunities
    - Overweight industries expected to perform well (Tailwinds)
    - Sector Rotation (RRGs) & Value Migration
  3. Portfolio Performance Attribution
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2
Q

TOP-DOWN & BOTTOM-UP ANALYSIS

A

Looking downstream

TOP DOWN: Inverted Pyramid: EIC
BOTTOM UP: Pyramid: CIE

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3
Q

COMPANY ANALYSIS: PAST & PRESENT

A

Company Analysis: Past and Present:

  • Determine business model
  • Analyze revenue and revenue drivers
  • Analyze operating profitability and working capital
  • Analyze capital investment structure (uses of capital and sources of financing)
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4
Q

INDUSTRY & COMPETITIVE ANALYSIS

A

Industry and Competitive Analysis:

  • Define industry
  • Analyze size, growth and character, profitability, market share trends
  • Analyze industry structure and external influences
  • Evaluate company’s competitive strategy and positioning and determine if company has a competitive advantage
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5
Q

COMPANY ANALYSIS (FORECASTING):

A

Company Analysis (Forecasting):

  • Determine forecast objects and approaches
  • Forecast revenue
  • Forecast operating profitability and working capital
  • Forecast capital investments and capital structure
  • Evaluate key risks and uncertaintie
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6
Q

WHY ANALYZE AN INDUSTRY?

A
  1. SIMILARITY IN BUSINESS MODELS: Companies share demand, supply, and risks.
  2. MOST IMPORTANT FACTOR: Industry is the MOST IMPORTANT factor in the sustainability of economic profit.
  3. GROWING INDUSTRY COMPANIES PERFORM BETTER: An average company in a growing industry may perform better than a good company in a dying industry
  4. IMPROVE FORECASTS: Better earnings forecasts; without broader perspectives, analysts may underestimate competitive forces & overestimate degree to which a company controls its destiny
  5. IDENTIFY INV. OPPORTUNITIES:
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7
Q

INDUSTRY & COMPETITIVE ANALYSIS STEPS

A

DISEC

D - Define Industry

Use third-party classification schemes
Judge similar/substitute products
Consider multidivisional companies
Account for geography

I - Industry Survey

Market Share
Market Growth Rate
Size
Profitability
Trends

S - Structure Analysis

Porter’s Five Forces analysis
Determine most important factors
Identify what to monitor

E - External Influences (PESTLE)

Political
Economic
Social
Technological
Legal
Environmental

C - Competitive Analysis (SCC)

Evaluate firm’s competitive strategy
Consider industry context
Determine competitive advantage

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8
Q

APPROACHES FOR IDENTIFYING SIMILAR COMPANIES

A

Companies are grouped:

  1. Based on PRODUCTS &/or SERVICES
  2. Based on their RELATIVE SENSITIVITY TO THE BUSINESS CYCLE

Defensives, Semi-Cyclicals & Cyclicals

A). A Cyclical Company is one whose profits are strongly correlated w the strength of the overall economy (eg: auto & tech)

B). Non Cyclicals are those whose performance is mostly independent of the business cycle (eg: Healthcare & Utilities)

Non-Cyclical companies are at times further labeled as GROWTH OR DEFENSIVE

  • Cyclical/Non-Cyclical is a spectrum (some very sensitive whereas others not sensitive at all)
  • Growth/Defensive labels may be misleading
  • Different regions might be at different stages of the business cycle
  1. Based on STATISTICAL SIMILARITIES
  • Companies with high correlations are grouped together (sectors that go up & down together)
  • High correlations might be because of chance
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9
Q

INDUSTRY CLASSIFICATION SYSTEMS

A

When conducting an industry analysis, a well-designed classification system is a useful starting point

Analysts can compare industry trends & relative valuation amongst companies

Classification systems provided by:
- Commercial Entities
- Government Entities

LIMITATIONS:
1. Groupings of companies w biz-model variations or that sell substitute products
2. Classification of multi-product companies
3. Geographical considerations
4. Changes in groupings over time that affect price-period comparability of industry stats

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10
Q

COMMERCIAL INDUSTRY CLASSIFICATION OVER GOVT. INDUSTRY CLASSIFICATION

A

because more frequently updated

BASIS:
1. Geography: Developed, Emerging & Frontier Markets
2. Sensitivity to Business Cycle (Cyclicality):
Defensives: STABLE EARNINGS
Cyclicals: SPORADIC EARNINGS
3. Statistical Similarities: companies w highly correlated returns grouped together
4. ESG Characteristics: carbon emissions:revenues; board & exec. personnel diversity & exposure to certain business viz. tobacco & gambling

SCP: STRUCTURE CONDUCT PERFORMANCE

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11
Q

MOST WIDELY USED COMMERCIAL INDUSTRY CLASSIFICATION SCHEMES

A

Major index providers classify their EQUITY INDICES into INDUSTRY GROUPINGS

  1. Global Industry Classification Standards (GICS) by MSCI (Morgan Stanley Capital Intl) & S&P Dow Jones Indices: Primary Biz Activities for revenue (4 TIER)
  2. Industry Classification Benchmark (ICB) by FTSE Russell (Financial Times Stock Exchange): SOURCE for MAJORITY of revenue (4 TIER)
  3. The Refinitiv Business Classification (TRBC) by Refinitiv
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12
Q

Global Industry Classification Standards (GICS)

A

Developed by MSCI (Morgan Stanley Capital International) & S&P Dow Jones Indices

4-tier structure to classify companies based on company’s PRIMARY BUSINESS ACTIVITY measured by REVENUE

11 Sectors
25 Industry Groups
74 Industries
163 Sub-Industries

GICS Sectors:
Mnemonic: MICE FUR CHIS

  1. Materials
  2. IT
  3. Consumer Discretionary
  4. Energy
  5. Financials
  6. Utilities
  7. Real Estate
  8. Communication Services
  9. Healthcare
  10. Industrials
  11. Staples/Consumer Staples
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13
Q

INDUSTRY CLASSIFICATION BENCHMARK (ICB)

A

Developed by Dow Jones & FTSE

4-tier structure to classify companies based on the SOURCE from which company derives MOST of its revenue

11 Industries
20 Supersectors
45 Sectors
173 Subsectors

ICB Industries:

  1. Energy
  2. Financials
  3. basic Materials
  4. IT
  5. Industrials
  6. Telecommunications
  7. Consumer Discretionary
  8. Utilities
  9. Consumer Staples
  10. Real Estate
  11. Healthcare
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14
Q

TRBC by Refinitiv

A

5 TIER STRUCTURE

14 Economic Sectors
33 Business Sectors
62 Industry Groups
154 Industries
898 Activities

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15
Q

GICS vs ICB DIFFERENCES

A

Both similar:

in no. of tiers (4)
&
method by which companies are assigned to particular groups (primary business activity vs source for most revenue)

But, use DIFFERENT NOMENCLATURE

The 2 systems can classify the same company v differently
eg: PAYPAL

GICS: IT>Software & Services>IT Services>Data Processing & Outsourced Services

ICB: Industrials>Industrial Goods & Services>Support Services>Financial Administration

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16
Q

CONSTRUCTING A PEER GROUP

A

A Peer Group is a group of companies engaged in similar biz activities whose ECONOMICS & VALUATION are influenced by closely related factors

Constructing a peer group is a subjective process:
- Commercial Classification Systems can be used as a starting point
- Investigate these companies further
- Confirm that each comparable company derives a significant % of revenue from a biz activity similar to the primary biz of the subject company

A company could belong to more than 1 peer group. eg: HP could be in PC industry & IT services industry

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17
Q

DESCRIBING & ANALYZING AN INDUSTRY & PRINCIPLES OF STRATEGIC ANALYSIS

A
  1. Analyze industry performance in relation to other industries & over time. (i1, i2, i3 over 10 years): Time-series analysis
  2. Identify industries that offer highest potential risk-adjusted returns
  3. Economic fundamentals & hence economic profits can vary substantially across industries (because of CYCLICALITY)
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18
Q

PORTER’S 5 FORCES (P5F)

A

HORIZONTAL FORCES:
- Bargaining Power of Buyer/Customer
- Bargaining Power of Supplier

VERTICAL FORCES:
- Threat of New Entrants
- Threat of Substitutes

CENTER:
MARKET RIVALRY: Internal Competitive Forces
- Industry Concentration
- Industry Capacity
- Market Share Stability
- Price Competition
- Industry Lifecycle

EXTERNAL INFLUENCES:
- Macroeconomic
- Social
- Governmental
- Demographic
- Technological

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19
Q

BARRIERS TO ENTRY IN P5F

A

High Barriers to Entry=
Discourage New Entrants=
Higher Pricing Power

Do not confuse barriers to entry with barriers to success

High Barriers to entry do not automatically lead to high pricing power.

This might happen if:
1. Price is a large % of customer’s purchase decision (Price-Sensitive Customers)
2. Apart from barriers to entry, barriers to exit is also high (eg: Auto Industry; Toyoto or Honda can’t get out the auto industry)

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20
Q

INDUSTRY CONCENTRATION in MKT. RIVALRY OF P5F

A

In concentrated industries, each player generally has high pricing power

  • Fortunes tied with the industry and more to gain by keeping prices high even though cutting prices might increase market share.

In segmented industries, each player generally has low pricing power
- More to gain by undercutting competition in an effort to gain market share
- Do not automatically assume that high conc. leads to high pricing power

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21
Q

CONC. & FRAGMENTED INDUSTRIES W STRONG & WEAK PRICING POWER

A

CONCENTRATED:
- Strong PP: Coke/Pepsi (Soft Drinks)
- Weak PP: Capital Intensive & sell commodity products eg: Boeing, Airbus (commercial aircrafts)

FRAGMENTED:
- Strong PP: AMCs viz. Fidelity
and Home Improvement (Home Depot)
- Weak PP: Consumer packaged goods, Airlines & Retail

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22
Q

INDUSTRY CAPACITY in MKT. RIVALRY OF P5F

A

Tight or Ltd. Capacity= High PP

Consider current capacity & future capacity needs
Physical capital takes a relatively long time to establish
Quicker to shift financial & human capital to new uses

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23
Q

MARKET SHARE STABILITY in MKT. RIVALRY OF P5F

A

Impacted by barriers to entry, switching costs & new product introductions

Stable Market Share indicates less competitive industries

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24
Q

PRICE COMPETITION in MKT. RIVALRY OF P5F

A

If price is a major factor in customer buying decisions, price competition will be high

Price-Sensitive Users

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25
Q

LIFE CYCLE STAGES (DEMAND VS TIME)

A
  1. EMBRYONIC: slow growth, high prices, significant investment, high risk
  2. GROWTH: rapidly increasing demand, falling prices, low competition
  3. SHAKEOUT: slowing growth, intense competition, declining profitability
  4. MATURE: little or no growth, industry consolidation, high barriers to entry
  5. DECLINE: negative growth, excess capacity & high competition

New Industries tend to be MORE COMPETITIVE

Is the company acting its age?

eg: Reinvesting or giving back dividends?

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26
Q

LIMITATIONS OF INDUSTRY ANALYSIS

A

All companies don’t complete all steps of the lifecycle

Regulations not accounted

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27
Q

EXTERNAL INFLUENCES P5F

A

Macroeconomic Factors
Technology
Demographic Factors (negative WACC in countries w ageing population)
Governments
Social Influences
Environmental Influencescc

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28
Q

COMPANY ANALYSIS

A

Analyze a company’s financial position, products &/or services & competitive strategy

2 MAJOR STRATEGIES:
1. Cost Leadership
2. Differentiation
3. Focus

Value
II opportunity (incentive to BUY): PULL
Price
II margins (incentive to SELL): PUSH
Cost

PRICING: Cost-Plus or Value-based

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29
Q

ELEMENTS TO BE COVERED IN A COMPANY ANALYSIS

A

Company Profile
Industry Characteristics
Demand Analysis for products/services
Supply Analysis for products/services
Pricing Analysis
Financial Ratios & Measures

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30
Q

Which of the following info about a company would most likely depend on an industry analysis? The company’s:

A. Dividend Distribution Policy
B. Competitive Environment
C. Trends in Personnel Expenses

A

B.

A & C are company specific

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30
Q

SPREADSHEET MODELLING

A

Spreadsheet modelling of financial statements helps to analyze & forecast revenues, operating & net income & cash flows

A widely used tool in company analysis, that can quantify effects of changes in variables in various financial statements

An array of assumptions are used in this tool

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30
Q

Which of the following is the least likely to be a method for grouping companies?

A. Statistical approaches that assess past correlations of securities’ returns
B. Similarity of products and services
C. Similarity of operating profit margins

A

C is correct. Profit margins are not used as a method for grouping companies.
Companies with similar profit margins may have little in common.

A is incorrect because it describes the statistical similarities approach, which is a method for grouping companies.

B is incorrect because similarity of products and services is one of the most common ways of grouping companies.

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31
Q

Companies are classified as cyclical or non-cyclical (defensive) on the basis of the exposure of their business to:

A. Their industry life cycle
B. The business cycle of the economy
C. The credit cycle, which affects their ability to borrow

A

B is correct. The cyclical/non-cyclical grouping reflects companies’ sensitivity to the economy’s business cycle.

A is incorrect because the industry life cycle describes how the industry evolves over time, not how it relates to economic fluctuations.

C is incorrect because the credit cycle explains the availability and cost of credit, not the fluctuations of output of the economy to which cyclical or non-cyclical companies are exposed.

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32
Q

Which of the following companies is most likely to have the greatest ability to quickly increase its capacity?

A. Legal Services Provider
B. Manufacturing company producing heavy machinery
C. Company operating cargo ships

A

A.

Capacity increases in providing legal services wouldn’t require significant fixed capital investments.

B & C are incorrect because the companies would require capital investments & capacity expansion would take time to implement.

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33
Q

External Influences: Which of the following industries is most affected by government regulation?

A. Oil Services
B. Pharmaceuticals
C. Confections & Candy

A

B.

Pharma has the highest amount of govt. & regulatory influences

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34
Q

Which of the following industries is least affected by technological innovation?

A. Oil Services
B. Pharmaceuticals
C. Confections & Candy

A

C.

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35
Q

Which of the following statements about industry characteristics is least accurate?

A. Manufacturing capacity has little effect on pricing in the confections/candy industry.
B. The branded pharmaceutical industry is considered to be defensive rather than a growth industry.
C. With respect to the worldwide market, the oil services industry has a high level of concentration with a limited number of service providers.

A

C is correct; it is a false statement. From a worldwide perspective, the industry is considered fragmented. Although a small number of companies provide the full range of services, competition by many smaller players occurs in niche areas. In addition, national oil service companies control significant market share in their home countries.

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35
Q

Company A is a mining company with operations in several countries.

Company B is a technology company providing video conferencing services.

Company C is a consumer company, an apparel producer, with facilities in a number of Latin American and Asian countries.

Which of the companies belongs to an industry most likely to be affected by environmental factors that analysts should evaluate?

A Company A
B Company B
C Company C

A

A

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36
Q

Which of the following statements best describes social influences that should be considered in evaluating the Consumer Goods industry?

Statement 1 Supply chain management, selling practices, and product labeling
Statement 2 Access and affordability, pricing policy
Statement 3 Impact of the industry on the environment

A

Statement 1: Correct!
- Transparent Supply Chain
- Good Selling Practices
- Honest & Ethical Product Labeling

2 & 3 describe characteristics that’re not social

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37
Q

Which of the following describes one of the ways governments influence large companies that produce and offer services relating to heating, air conditioning, and lighting systems?

A Purchasing goods and services
B Determining availability of credit
C Providing raw materials

A

A.

Governments are major buyers of goods & services

B- incorrect because govts don’t normally provide credit to the industry

C- incorrect because the pvt sector provides raw materials to customers

A. Purchasing goods and services

Explanation:
Governments buy products and services for public projects.
Directly influences demand for company offerings.
Supports industry growth and stability.

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38
Q

1 An analyst makes the following statement:

“Analysis of a company’s supply includes examination of labor relations; sources of and access to raw materials, including concentration of suppliers; and analysis of the company’s production capacity.”

The statement is:

A. Correct.
B. Incorrect because the analysis of supply should also include analysis of the stage in the product life cycle.
C. Incorrect because the analysis of supply should consider the product’s differentiating characteristics.

A

A.

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39
Q

The challenge with using spreadsheet forecasting models stems from the fact that:

A. The analyst may have a false sense of understanding the business.
B. Spreadsheet models cannot be used to compare companies with their peer groups.
C. Spreadsheet models require precise inputs.

A

A.

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40
Q

DEFENSIVES vs CYCLICALS & MATURE vs GROWTH

A

GROWTH
Defensives: biotech, software & gaming
Cyclicals: semiconductors, fintech & digital ads

MATURE
Defensives: utilities, beverages, pharmaceuticals
Cyclicals: crude oil, natural gas & freight transportation

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41
Q

ROIC: Industry Profitability Measure

A

VALUE CREATION METRIC: creates or destroyed value
AGNOSTIC TO CAPITAL STRUCTURE
TIME SERIES ROIC IS BETTER

ROIC= NOPAT Or EBIAT/EQUITY+DEBT+MINORITY INTEREST

DOESN’T CONSIDER FINANCIAL RISK

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42
Q

MARKET SHARE TRENDS & MAJOR PLAYERS

A

Market shares are measured by expressing the industry participant’s annual revenues as percentages of industry’s size each year

HERFINDAHL-HIRSCHMAN INDEX (HHI) measures industry concentration

Calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. High numbers indicate high concentration and vice versa.

HHI of a market composed of 4 firms with shares of 30,30,20,20 is 30^2+30^2-20^2+20^2= 2600.

Max HHI for monopoly= 100^2: 10,000
>2500: highly concentrated
1500-2500: moderately concentrated

Acquisitions in highly concentrated markets that increase HHI by >200 pts are frequently subject to regulatory challenges.

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43
Q

INDUSTRY SALES GROWTH if correlated to GDP Growth, then industry is:

A

CYCLICAL

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44
Q

Fiscal vs Monetary Policy

A

FISCAL POLICY: government spending & tax rates

MONETARY POLICY: interest rates & money supply

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45
Q

COMPETITIVE POSITIONING: An analyst should assess a company’s competitive positioning along 3 dimensions:

A

Does the strategy:

  1. Create MOAT/defence against P5F
  2. benefit or lose from external PESTLE influences?
  3. Does the company have RESOURCES & CAPABILITIES to successfully EXECUTE said strategy
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46
Q

COST LEADERSHIP: MEANS OF EXECUTION

A
  1. Economies of scale from fixed costs
  2. Favourable access to raw materials
  3. Culture of strict cost control
  4. Aggressive pricing to gain high volume
  5. Low-cost distribution
  6. Economies of scope
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47
Q

DIFFERENTIATION: MEANS OF EXECUTION

A
  1. Investments in Advertising, Brand, Customer Service, Proprietary Distribution Channels
  2. Protection using IPR: trademarks, copyrights, patents
  3. Superior quality, unique features
  4. Culture of strong customer experience
  5. Premium Pricing
  6. Integration of services, software and hardware
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48
Q

FOCUS: MEANS OF EXECUTION

A
  1. Proximity to customers and strong understanding of their needs
  2. May incorporate elements of strategy from both cost leadership & differentiation, but focused on particular group.
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49
Q

COST LEADERSHIP: DEFENDS AGAINST WHICH OF P54?

A

1 HORIZONTAL+ 1 VERTICAL + CENTRAL

  1. Threat of new entrants: capital requirements and scale advantages deter new entrants
  2. Bargaining power of customers: customers can only bring down costs of marginal producer, leaving margins for cost leaders
  3. Industry Rivalry: rivals may not be able to compete w cost leaders via pricing war
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50
Q

DIFFERENTIATION: DEFENDS AGAINST WHICH OF P54?

A

BOTH VERTICAL & BOTH HORIZONTAL

  1. Threat of new entrants & substitutes: Customer loyalty to unique product can deter switching & protect market share
  2. Bargaining power of customers: customers may be unable or unwilling to comparison shop or switch
  3. Bargaining power of suppliers: the company has the ability to pass along price increases to customers and/or margin to absorb cost increases
51
Q

FOCUS: DEFENDS AGAINST WHICH OF P54?

A

BOTH VERTICAL FORCES + 1 HORIZONTAL FORCE

  1. Threat of new entrants & substitutes: Customer loyalty to unique product can deter switching & protect market share
  2. Bargaining power of customers: customers may be unable or unwilling to switch or comparison shop
52
Q

COST LEADERSHIP: INDUSTRY APPROPRIATENESS

A
  1. Capital-Intensive
  2. Price-sensitive customers
  3. Customers don’t value or notice product differences
  4. Minimal innovation in the industry
53
Q

DIFFERENTIATION: INDUSTRY APPROPRIATENESS

A
  1. Price isn’t foremost concern for customers
  2. They value distinctiveness
  3. Innovation in industry w products varying in forms & features
54
Q

FOCUS: INDUSTRY APPROPRIATENESS

A
  1. Difficult or uneconomical to serve customer group, product or geography for other players
55
Q

COST LEADERSHIP: RISKS TO STRATEGY

A
  1. Cost inflation or loss of discipline
  2. Tech change that results in loss of cost leadership or market share
  3. Desire for premiumization among customers
56
Q

DIFFERENTIATION: RISKS TO STRATEGY

A
  1. Customers imitate
  2. Buyers become sophisticated & no longer demand level of service
  3. Pricing premium becomes too high for customers to bear
  4. May preclude high market share, as customers value exclusivity
57
Q

FOCUS: RISKS TO STRATEGY

A
  1. Larger competitors outcompete on price
  2. Differences in demand between narrow group & industry as a whole narrow
  3. Buyers become sophisticated & no longer demand the level of service
58
Q

IMP: An alternative method of grouping companies by geography is least likely to be
completed using:

A. location of head office.
B. geographic composition of revenue.
C. primary listing of its equity securities.

A

B is correct.

Classification by country is typically by the country where the issuer is incorporated, the country of the primary listing of its equity securities, the location of its headquarters, or market perception.

Note that classification by the geographic composition of revenue is generally not the approach taken, though this aspect may be the foremost concern for an analyst.

59
Q

A market consists of three firms with market shares of 50%, 30%, and 20%. The
Herfindahl-Hirschman Index (HHI) is closest to:

A. 0.38.
B. 2,500.
C. 3,800.

A

C.

C is correct.

The Herfindahl-Hirschman Index (HHI) is calculated as the sum of
the squares of competitor market shares.

In this example, the HHI is calculated
as (502 + 302 + 202 = 3,800). A incorrectly calculates the HHI using the percentage
market shares (0.52 + 0.32 + 0.22 = 0.38).

B incorrectly calculates the HHI
using only the market leader concentration (502 = 2,500).

60
Q

IMP: Lower industry concentration is usually associated with a high degree of competitive intensity unless the industry is most likely:

A. global.
B. service-oriented.
C. one with low product differentiation.

[Hint: Odd one out/contrast/+- & POE]

A

B is correct.

Lower industry concentration, defined as many small competitors in the market, is usually associated with a high degree of competitive intensity unless the industry is service-oriented, is local in nature, or has high product differentiation.

  • Lower industry concentration means many small competitors.
  • High competitive intensity is common in such markets.

Exception: Service-oriented industries can be local or have unique offerings.

  • These factors reduce competitive intensity despite many small players.

A and C: Incorrect because global reach and low differentiation increase competitive intensity.

61
Q

Increased environmental regulations on automotive manufacturers will most likely have which of the following effects on the threat of new entrants?

A. An increase
B. A decrease
C. No change

A

A is correct.

Increased environmental regulations on automotive manufacturers represent an additional cost for compliance when building a new manufacturing facility and increase the barriers to entry into the industry.

62
Q

The CEO of a large law firm is concerned about a new mobile application that uses algorithms to auto-complete legal forms and questions in discovery and provides recommendations for small-claims matters at a much lower cost than a traditional law firm charges.

As a result, the CEO is contemplating whether the firm should develop and launch its own branded application, which would affect its short-term profitability but maintain its existing customer base, or give up market share to focus on more complex claims with higher profitability. This scenario is an example of:

A. defensiveness.
B. innovator’s dilemma.
C. sustaining innovation.

A

B is correct. The described mobile application represents a fundamental change in the business model of a law firm. The application is a disruptive, not sustaining, innovation, as it brings new entrants into the market but with a very different value proposition. The CEO’s decision represents the “innovator’s dilemma”: the firm can either invest in the disruptive innovation, speeding the decline of its existing business but not losing market share, or ignore the innovation and lose market share while continuing to generate strong profits in the near term.

63
Q

PESTLE analysis is a framework for identifying:

A. industry themes.
B. the level of industry concentration.
C. determinants of industry profitability.

A

A.

A is correct. PESTLE analysis is a framework for identifying “themes” or “narratives” that investors may take a perspective on and desire exposure to.

B refers to the Herfindahl-Hirschman Index.

C refers to Porter’s Five Forces

64
Q

The means of executing cost leadership competitive strategies do not include which of the following?

A. proximity to customers
B. favorable access to raw materials
C. economies of scale from fixed costs

A

A.

A is correct. Proximity to customers is a means of executing a focus strategy.

The means of executing a cost leadership strategy include economies of scale from fixed costs, favorable access to raw materials, a culture of strict cost control, aggressive pricing to gain high volume, low-cost distribution, and economies of scope.

65
Q

Which of the following is most likely a risk of executing a differentiation competitive strategy?

A. pricing premiums become too high
B. larger competitors outcompete on price
C. a desire for premiumization among customers

A

A.

The risks of a differentiation strategy include imitation by competitors, buyers becoming sophisticated and no longer demanding level of service, and pricing premiums becoming too high for customers to beat; such a strategy may also preclude high market share, as customers value exclusivity. B relates to a focus strategy, while C relates to a cost leadership strategy.

66
Q

When assigning a company to an industry, which of the following is a limitation
of using third-party industry classification schemes?

A. Currency differences
B. Single-product companies
C. Strictly hierarchical taxonomies

A

C is correct. Commercial classification schemes such as GICS, IBC, and TRBC are examples of strictly hierarchical taxonomies that classify a company to a single group, regardless of whether the company sells multiple types of products or services.

67
Q

A factor that determines sensitivity to the business cycle is most likely:

A. customer migration to substitute products.
B. interest rate exposure of the business model.
C. growth rates in line with broader economic activity.

A

B is correct.

Factors that determine sensitivity to the business cycle include the degree to which sales are discretionary or necessary for consumers, pricing power, the interest rate exposure of the business model, and whether the product is a durable or capital good versus a recurring purchase such as consumables and subscription services.

A and C are incorrect, as they reflect features of a mature industry but are not necessarily more cyclical.

68
Q

A common measure of industry concentration is:

A. Porter’s Five Forces.
B. the PESTLE framework.
C. the Herfindahl-Hirschman Index.

A

C is correct. The Herfindahl-Hirschman Index (HHI) is a common measure of industry concentration that is calculated as the sum of the squares of competitor market shares.

Porter’s Five Forces model evaluates an industry’s
level of competitive rivalry and profitability.

The PESTLE framework is more concerned with an industry’s growth rate and market share dynamics.

69
Q

Identify the following statement as true or false. Justify your answer.

Some of the forces included in Porter’s Five Forces framework are the threat of new entrants, sensitivity to the business cycle, and the bargaining power
of customers.

A

False. Porter’s Five Forces model uses the threat of substitutes, the threat of new entrants, the bargaining power of customers, and the bargaining power of suppliers to determine the rivalry among existing competitors. Sensitivity to the business cycle is not one of the forces.

70
Q

The price competition historically demonstrated by automakers and aircraft manufacturers is best described as an example of:

A. the threat of substitutes.
B. the bargaining power of suppliers.
C. the rivalry among existing competitors.

A

C is correct.

Despite relatively low risks from the other Five Forces, automakers
and aircraft manufacturers compete fiercely on price, offering promotions and generous financing and warranty terms in an attempt to capture every sale.

71
Q

Standardization of a product will ____________ (increase/decrease/have no effect on) the bargaining power of customers.

A

Standardization of a product will increase the bargaining power of customers.

For example, oil refiners pay for crude oil based on its grade, not on its specific oil producer; crude oil within a grade is interchangeable.

72
Q

Impression Ltd. is a fictional company that designs, manufactures, and sells skin care and beauty products.

A PESTLE analysis for Impression Ltd. would most likely identify which of the following?

A. A customer of Impression Ltd., a large e-commerce retailer, is acquiring a private label manufacturer of skin care products.

B. Increased discussion by legislatures around instituting an excise tax on
disposable plastic packaging as part of a package of carbon taxes

C. An online, direct sales competitor has launched a suite of photo filters that integrate with leading social media apps based on its beauty products.

A

B is correct. PESTLE analysis is concerned with identifying and evaluating external forces on an industry, which include political forces such as a packaging tax.

A and C are incorrect, as they are competitor moves within the beauty industry.

73
Q

As a venture capital investor, you are on the board of Ridge Inc., a fictional company that is entering the auto industry, which is characterized by high capital intensity, minimal switching costs for customers because regulations require standardization of many features, and price consciousness of customers except among a relatively small percentage of affluent consumers.

Based on these observations, recommend and justify a competitive strategy
to the rest of Ridge Inc.’s board.

A

A cost leadership strategy is one competitive strategy that might be successful for Ridge Inc.

Since most customers are price conscious and face minimal switching costs between automakers or models, a low selling price can be an effective way to gain market share.

Combined with high capital intensity, such a strategy might enable Ridge to operate at an economic profit if it produces and sells enough volume and maintains fixed-cost discipline to keep unit costs low.

Other competitive strategies that might be successful for Ridge include a differentiation strategy aimed at luxury or performance customers.

FOCUS: Combines both

74
Q

Over the long run:

A. business cycles result in profitability differences by industry.
B. company-specific factors such as competitive strategy result in profitability
differences by industry.
C. structural factors result in profitability differences by industry.

A

C is correct.

Structural factors, such as Porter’s Five Forces, drive profitability and profitability differences by industry in the long run.

Company-specific factors result in company profitability levels around the industry median, while changes in the business cycle drive short-run profitability for both industries and companies.

75
Q

Which of the following is an industry, not a company specific, attribute?

A. Competitive strategy
B. Business model variation
C. Sensitivity to the business cycle

A

C is correct.

Sensitivity to the business cycle is an example of a factor that influences an entire industry.

A and B are examples of company-specific attributes, which also include company size and strategy execution.

76
Q

Explain why industry has a significant effect on company growth and profitability.

A

Companies in the same industry compete in similar product markets as sellers and in factor markets as buyers, so they tend to be exposed to the same demand and supply opportunities and risk factors.

For example, while a restaurant company that sells chicken has a different product than a restaurant that sells pastries, both are competing for a similar customer need (prepared food), employ similarly skilled workers, and have capital equipment and real estate.

77
Q

CLASSIFYING COMPANIES INTO INDUSTRIES

A

Single Biz Line= Classify based on Single Biz line
Else,
w multiple biz lines= classify based on segment/line w >=60% revenue
Else,
>= 50% revenue
Else,
use discretion or classify as multi-industry or conglomerate

78
Q

Contrast the Global Industry Classification Standard (GICS) commercial scheme with the Standard Industrial Classification (SIC) third-party classification system in terms of geographic coverage, update frequency, and the addition of new companies.

A

GICS= global; annually updated
SIC= US; infrequently updated

The GICS commercial scheme is determined on a global basis, updated at least annually, and adds new companies frequently, while the SIC is US-only, infrequently updated, and does not regularly add new companies

79
Q

The GICS, ICB, and TRBC commercial industry classification schemes suffer from which common problem when used by analysts?

A. They quickly become out of date.
B. They cover a limited number of countries.
C. They often classify multi industry companies inaccurately.

A

C is correct.

Commercial industry classification schemes are strictly hierarchical and assign each company to a single industry.

Multi-industry companies are classified using evaluations of segment revenues, profits, or assets or the discretion of the scheme creator.

This approach often results in classifications that are different from analyst expectations or in “multi industry” classifications that are challenging to use in practice.

80
Q

Identify whether each of the following sectors is generally considered “cyclical”
or “defensive.”

I. Consumer Staples Cyclical Defensive
II. Consumer Discretionary Cyclical Defensive
III. Energy Cyclical Defensive
IV. Healthcare Cyclical Defensive
V. Utilities Cyclical Defensive
VI. Financials Cyclical Defensive
VII. Industrials Cyclical Defensive
VIII. Technology Cyclical Defensive
IX. Materials Cyclical Defensive
X. Real Estate Cyclical Defensive

A
  1. Consumer Staples: Defensive
  2. Consumer Discretionary: Cyclical
  3. Energy: Cyclical
  4. Healthcare: DEFENSIVE
  5. Utilities: Defensive
  6. Financials: Cyclical
  7. Industrials: CYCLICAL
  8. Technology: Defensive
  9. Materials: Cyclical
  10. Real Estate: Defensive
81
Q

Identify the following statement as true or false. Justify your answer.

Industry size is typically measured by the total annual sales of all industry constituents.

A

False.

Industry size is typically measured by the total annual sales from the product or customer perspective, which is not necessarily the sum of total sales of each industry constituent as some constituents may have segments in other industries.

82
Q

A section of the fast-food market consists of 10 firms operating 1,840 restaurant locations across North America and currently has a Herfindahl- Hirschman Index (HHI) of 1,516.

The market leader announces plans to acquire its closest competitor and commits to not closing any locations at either company. As a result, the HHI will most likely:

A. decrease.
B. not change.
C. increase.

A

C is correct.

The Herfindahl-Hirschman Index (HHI) is calculated as the sum of the squares of competitor market shares.

In this example, the market share of the leading company would increase and the number of competitors would decrease, which would increase the HHI.

The number of store locations does not affect the HHI

82
Q

Identify the following statement as true or false. Justify your answer.

Companies in different stages of the life cycle within the same industry can differ materially in terms of cyclicality.

A

True.

An industry is defined as companies with similar products or services from the perspective of a customer.

A new entrant in an industry may have low but increasing market share, which can serve as a growth driver in addition to an economic expansion. The new entrant may therefore be less affected than a mature company by a recession.

83
Q

Amazon.com’s change in US retail market share from 2X15 to 2X19 is best described as an example of:

A. a disruptive threat.
B. achieving peak penetration rate.
C. saturation of its addressable market.

A

A.

As the pioneer in US e commerce, Amazon achieved roughly 40% market share by using Amazon.com as an online shopping platform.

Therefore, Amazon.com is an example of a disruptive threat to the established retail industry.

Based on US net sales from 2X15 to 2X19, it is uncertain whether Amazon achieved its peak penetration rate or saturated its addressable market, as it continued to increase its market share component of the top 10 retailers’ share from 7% to 14%.

84
Q

Current economic forecasts call for an increase of 3% in US GDP, an inflation rate of 1.5%, and decreasing consumer sentiment. Therefore, over the next fiscal year, Nguyen would most likely expect Warehouse Club Inc.’s total sales to:

A. decrease.
B. increase 2%–5%.
C. increase 5%–8%.

A

B.

Nguyen classifies the industry as mature and moderately cyclical, and Warehouse Club Inc. operates a single line of business with no new products or services defined.

Thus, Warehouse Club Inc.’s total sales would move in line with broader US GDP growth as a stable company in a mature industry.

85
Q

In 2009, Amazon.com started Amazon Publishing, extending its business into publishing books in addition to book retailing.

From the perspective
of a competing publisher, this is an example of:

A. decreasing the threat of substitutes.
B. decreasing the bargaining power of suppliers.
C. increasing the bargaining power of customers.

A

C. Amazon now has more leverage over customers

Amazon Publishing is an example of backward integration, as it could now produce and sell its own published content as well as other publishers’ content.

The creation of Amazon Publishing increased the bargaining power of Amazon as a customer and increased the level of competitive rivalry in the publishing industry.

Amazon Publishing would also increase the threat of substitutes and the bargaining power of suppliers, as authors and end users could work directly with Amazon.

86
Q

Proposed government regulations for the restaurant industry would introduce
new compliance requirements for all new and existing facilities to reduce the environmental impact of take-out and delivery options. These regulations would apply only to restaurants with a physical address and would not apply to mobile restaurants (i.e., food trucks).

For an existing restaurant with several physical locations, these regulations would:

A. reduce competitive rivalry by increasing the barriers to entry.
B. increase competitive rivalry by increasing the threat of substitutes.
C. both reduce and increase competitive rivalry.

A

C. Mixed Impact. Increases competitive rivalry but also increases threat of substitutes.

The proposed regulatory changes would have a mixed impact on the level of competitive rivalry in the restaurant industry.

These environmental regulations would increase the entry barriers by increasing the costs of setting up a new restaurant, while also increasing the threat of substitutes by making it easier to open mobile restaurants, which do not have to comply with these regulations.

87
Q

To compete with online retailers, Warehouse Club Inc. is considering installing a sophisticated image recognition system in its stores to track and analyze consumer behavior in order to identify clothing items that were tried on but not purchased. For Warehouse, this change would be a
____________________ (sustaining or disruptive) innovation.

A

For Warehouse, this change would be a sustaining innovation.

Sustaining improvements focus on adding MARGINAL features without a fundamental change in functionality or operation.

For example, the proposed system would provide incremental customer and product knowledge but would not represent a fundamental change in Warehouse’s go-to market strategy.

Disruptive innovation is a change that creates a new market or enters an existing one with a different value proposition.

88
Q

Identify the following statement as true or false. Justify your answer.

The CEO of Iliso Marketplace Ltd. expects revenue growth to be in line with US GDP growth for the next two fiscal years. As a result, the CEO approves an extension to an existing aggressive sales promotion and discount strategy that has been in place for the past 18 months.

This extension will increase the competitive rivalry in the industry.

A

False.

The sales promotion and discount strategy is already in place within this mature industry, thus demonstrating a history of price competition among the competitors

89
Q

A PESTLE analysis for Iliso Marketplace Ltd. would most likely identify which of the following items?

A. A competitor is acquiring a fleet of delivery vehicles instead of using third-party parcel carriers.
B. The increasing political discussion around instituting a tax on parcel deliveries of less than 2 kilograms
C. A competitor is launching an augmented reality application to allow tech-savvy consumers to view home décor and furniture products in real time.

A

B.

The political discussion around potential applications of a tax is an example of a political trend changing over time.

This theme could potentially affect Iliso Marketplace Ltd.

A (fleet of delivery vehicles) and C (augmented reality) are examples of COMPETITIVE ACTIONS that could affect the level of competitive rivalry in the industry.

90
Q

Manitou Resorts is a 25-room boutique hotel located in a rural mountain area approximately three hours from a major urban center. It provides accommodations, high-end dining options, and an on-site health and wellness spa.

Manitou’s primary customers are young professional couples in the middle-to-upper-income brackets.

The CEO is contemplating several
options for expansion, as the resort is frequently at full capacity.

Which of the following initiatives would be consistent with Manitou’s current competitive strategy?

[Hint: Comp. Strategy is cost-adv, diff or focus]

A. The development of 10 stand-alone lakefront cottages to accommodate families of up to six people, providing access to family-related activities such as pools, water sports, and evening entertainment
B. The addition of conference room facilities to accommodate corporate events that could be priced at a 10%–15% discount to a 150-room franchise hotel approximately 30 minutes from Manitou
C. Developing a management and reservation system to identify recommendations to referral partners such as golf courses, taxi/shuttle services, or other guest experiences to increase fee revenue

A

C.

Manitou Resorts’ current competitive strategy is a FOCUS
strategy targeting a specific customer segment: young professionals in middle-to upper-income brackets located in a nearby city and focused on wellness and relaxation.

The other options represent an expansion into new customer segments (family vacations and corporate events), which could be inconsistent with its current customer base.

B represents a cost leadership competitive strategy, while A represents a differentiation strategy.

91
Q

Warehouse Club Inc. is considering launching a “private label” brand of non-perishable food products. Based on its current competitive strategy, which of the following is the most appropriate rationale to support?

A. Customers do not notice product differences.
B. Customers value new product features and forms.
C. Products can be segmented into regular and premium brands.

A

A.

Warehouse Club Inc.’s current competitive strategy is cost leadership.

In a cost leadership strategy, industry appropriateness is determined by capital intensity, price-conscious customers, customers not valuing or noticing product differences, and minimal innovation in the industry.

B represents an example of a differentiation strategy.

C represents an example of a focus strategy.

92
Q

To defend against the bargaining power of suppliers, customers may be unable or unwilling to comparison shop or switch in which of the following competitive strategies (select all that apply):

___ Cost leadership
___ Differentiation
___ Focus

A

Both differentiation and focus. That “customers may be unable or unwilling to comparison shop or switch” is a common feature of both differentiation and focus strategies.

In a cost leadership strategy, “customers can only bring prices down to the costs of the marginal producer, leaving margin for the cost leaders.”

93
Q

A risk to a differentiation competitive strategy is:

A. limited market share due to exclusivity.
B. larger competitors outcompete on price.
C. technological change that results in loss of market share.

A

A.

Since a differentiation strategy pursues a unique product or service offering, it creates a risk that the strategy may preclude high market share, as customers value exclusivity.

B is a risk to a focus strategy where larger competitors outcompete on price.

C is a risk to a cost leadership strategy where the technological change results in cost leadership or market share loss.

94
Q

A large online retailer in the USA has begun to offer a “price matching” guarantee on its website to match any competitor’s online price for an identical product, including Iliso Marketplace. Recommend and justify whether Iliso should launch a similar guarantee to protect its market share.

A

NO. PRICING WAR.

No, Iliso should not launch a similar guarantee.

A price-matching guarantee is a strategy pursued by companies with a cost leadership approach by using aggressive pricing to gain volume.

Iliso Marketplace Ltd. operates with a differentiation strategy that permits premium pricing if aligned with a strong customer experience.

If Iliso maintained its customer experience offering and began to reduce its revenue to match cost leaders, the company would likely decrease its overall profitability.

95
Q

Which of the following is least likely to involve industry analysis?

A. Sector rotation strategy.
B. Top-down fundamental investing.
C. Tactical asset allocation strategy.

A

C is correct.

Tactical asset allocation involves timing investments in asset classes and does not make use of industry analysis.

A= Tactical means Short Term
Sector Rotation is based on tailwinds (involves sector analysis)

B= Top-Down involves Macro to Micro

96
Q

A sector rotation strategy involves investing in a sector by:

A. making regular investments in it.
B. investing in a pre-selected group of sectors on a rotating basis.
C. timing investment to take advantage of business-cycle conditions.

A

C is correct.

A sector rotation strategy is conducted by investors
wishing to time investment in industries through an analysis of
fundamentals and/or business-cycle conditions.

SECTOR ROTATION= long-term tailwinds based investing

A= SIPs (criteria/investing rationale not mentioned)

B= pre-selected on ROTATING BASIS (short-term)

97
Q

Which of the following information about a company would most likely
depend on an industry analysis? The company’s:

A. dividend policy.
B. competitive environment.
C. trends in corporate expenses.

A

B is correct.

Determination of a company’s competitive
environment depends on understanding its industry.

A= Company Specific
C= Company Specific

98
Q

Which industry classification system uses a three-tier classification system?

A. Russell Global Sectors.
B. Industry Classification Benchmark.
C. Global Industry Classification Standard

A

A is 3-tier

B&C are 4-tier

GICS= S&P DJI & MSCI (MS Capital Intl.)

ICB= FTSE Russell (FT Stock-Exch.)

TRBC: The Refinitiv Business Classification (Refinitiv)

99
Q

In which sector would a manufacturer of personal care products be classified?

A. Health care.
B. Consumer staples.
C. Consumer discretionary.

A

B is correct.

Personal care products are classified as consumer staples in the “Description of Representative Sectors.”

100
Q

A automotive manufacturer is most likely classified in which of the following industry sectors?

A. Consumer staples
B. Industrial durables
C. Consumer discretionary

A

C is correct.

Automotive manufacturers are classified as consumer
discretionary. Consumer discretionary companies derive a majority of revenue from the sale of consumer-related products for which demand tends to exhibit a high degree of economic sensitivity that is, high demand during periods of economic expansion and low demand during periods of contraction.

101
Q

Which of the following statements about commercial and government industry classification systems is most accurate?

A. Many commercial classification systems include private for-profit
companies.
B. Both commercial and government classification systems exclude
not-for-profit companies.
C. Commercial classification systems are generally updated more
frequently than government classification systems.

A

C.

Commercial systems are generally updated more
frequently than government systems, and include only publicly traded for-profit companies.

102
Q

Which of the following is not a limitation of the cyclical/non cyclical descriptive approach to classifying companies?

A. A cyclical company may have a growth component in it.
B. Business-cycle sensitivity is a discrete phenomenon rather than a continuous spectrum.
C. A global company can experience economic expansion in one part
of the world while experiencing recession in another part.

A

B is correct.

Business-cycle sensitivity falls on a continuum/spectrum and is not a discrete “either–or” phenomenon.

A: Cyclical may be Growth or Defensive: possible. True

B: WRONG. Business cycle Cylicity is a SPECTRUM

C: True

103
Q

A cyclical company is most likely to:

A. have low operating leverage.
B. sell relatively inexpensive products.
C. experience wider-than-average fluctuations in demand

A

C is correct.

Cyclical companies are sensitive to the business cycle, with low product demand during periods of economic contraction and high product demand during periods of economic expansion.

They, therefore, experience wider-than-average fluctuations in product demand

104
Q

A company that is sensitive to the business cycle would most likely:

A. not have growth opportunities.
B. experience below-average fluctuation in demand.
C. sell products that the customer can purchase at a later date if necessary.

A

C is correct.

Customers’ flexibility as to when they purchase the product makes the product more sensitive to the business cycle

A= can be either growth or defensive

B= no. above average flucn. in demand

C= true.

105
Q

Which of the following factors would most likely be a limitation of applying business cycle analysis to global industry analysis?

A. Some industries are relatively insensitive to the business cycle.
B. Correlations of security returns between different world markets are relatively low.
C. One region or country of the world may experience recession while another region experiences expansion.

A

C is correct.

Varying conditions of recession or expansion around the world would affect the comparisons of companies with sales in different regions of the world.

A can’t be the answer because it’s about industry insensitivity to business cycles, not the global aspect.

B can’t be the answer because it’s about market correlations, not industry analysis.

106
Q

Which of the following statements about peer groups is most accurate?

A. Constructing a peer group for a company follows a standardized process.

B. Commercial industry classification systems often provide a starting point for constructing a peer group.

C. A peer group is generally composed of all the companies in the most narrowly defined category used by the commercial industry classification system

A

B.

Constructing a peer group is a SUBJECTIVE process, and a LOGICAL STARTING POINT is to begin with a commercially available classification system.

This system will identify a group of companies that may have properties comparable to the business activity of interest.

A: may or may not be standardized (diff. standards across industry)

B: true

C: no. most narrow?

107
Q

With regard to forming a company’s peer group, which of the following statements is not correct?

A. Comments from the management of the company about competitors are generally not used when selecting the peer group.

B. The higher the proportion of revenue and operating profit of the peer company derived from business activities similar to the subject company, the more meaningful the comparison.

C. Comparing the company’s performance measures with those for a potential peer-group company is of limited value when the companies are exposed to different stages of the business cycle

A

A.

A is correct because it is a false statement.

Reviewing the annual
report to find management’s discussion about the competitive environment and specific competitors is a suggested step in the process of constructing a peer group.

108
Q

When selecting companies for inclusion in a peer group, a company operating in three different business segments would:

A. be in only one peer group.
B. possibly be in more than one peer group.
C. not be included in any peer group.

A

B.

The company could be in more than one peer group depending on the demand drivers for the business segments, although the multiple business segments may make it difficult to classify the company.

A: Not true= can be in multiple peer gps due to 3 biz segments

B: True

C: will be included

primary biz activity-60%-50%-conglomerate/discretion

109
Q

An industry that most likely has both high barriers to entry and high barriers to exit is the:

A. restaurant industry.
B. advertising industry.
C. automobile industry.

A

C.

For the automobile industry, the high capital requirements and other elements mentioned in the reading provide high barriers to entry, and recognition that auto factories are generally only of use for manufacturing cars implies a high barrier to exit.

110
Q

Which factor is most likely associated with stable market share:

A. Low switching costs.
B. Low barriers to entry.
C. Slow pace of product innovation

A

C. Most Capex.

A slow pace of product innovation often means that
customers prefer to stay with suppliers they know, implying stable market shares.

111
Q

Which of the following companies most likely has the greatest ability to quickly increase its capacity?

A. Restaurant.
B. Steel producer.
C. Legal services provider.

A

C. Least Capex.

Capacity increases in providing legal services would not involve several factors that would be important to the other two industries, including the need for substantial fixed capital investments or, in the case of a restaurant, outfitting rental or purchased space.

These requirements would tend to slow down, respectively, steel production and restaurant expansion.

112
Q

A population that is rapidly aging would most likely cause the growth rate of the industry producing eye glasses and contact lenses to:

A. decrease.
B. increase.
C. not change.

A

B.

Vision typically deteriorates at advanced ages.

An increased number of older adults implies more eyewear products will be purchased.

113
Q

If over a long period of time a country’s average level of educational accomplishment increases, this development would most likely lead to the country’s amount of income spent on consumer discretionary goods to:

A. decrease.
B. increase.
C. not change.

A

B.

As their educational level increases, workers are able to perform more skilled tasks, earn higher wages, and as a result, have more income left for discretionary expenditures.

114
Q

If the technology for an industry involves high fixed capital investment, then one way to seek higher profit growth is by pursuing:

A. economies of scale.
B. diseconomies of scale.
C. removal of features that differentiate the product or service provided.

A

A.

Seeking economies of scale would tend to reduce per unit costs and increase profit.

115
Q

Which of the following life-cycle phases is typically characterized by high prices:

A. Mature.
B. Growth.
C. Embryonic.

A

C. The embryonic stage is characterized by SLOW GROWTH & HIGH PRICES.

116
Q

In which of the following life-cycle phases are price wars most likely to be absent?

A. Mature.
B. Decline.
C. Growth.

A

C.

The growth phase is not likely to experience price wars because expanding industry demand provides companies the opportunity to grow even without increasing market share.

When industry growth is stagnant, companies may only be able to grow by increasing market share, e.g., by engaging in price competition

117
Q

When graphically depicting the life-cycle model for an industry as a curve, the variables on the axes are:

A. price and time.
B. demand and time.
C. demand and stage of the life cycle

A

B.

The industry life-cycle model shows how demand evolves through time as an industry passes from the embryonic stage through the stage of decline.

118
Q

Industry consolidation and high barriers to entry most likely
characterize which life-cycle stage?

A. Mature
B. Growth
C. Embryonic

A

A.

Industry consolidation and relatively high barriers to entry are two characteristics of a mature-stage industry.

119
Q

Which of the following is most likely a characteristic of a concentrated industry?

A. Infrequent, tacit coordination.
B. Difficulty in monitoring other industry members.
C. Industry members attempting to avoid competition on price.

A

C.

CONCENTRATED means FEWER MEMBERS. power conc. w fewer key players.

So, A: coordination would be easier w fewer members

B: Easy to monitor players.

The relatively few members of the industry generally try to avoid price competition.

120
Q

Which of the following industry characteristics is generally least likely to produce high returns on capital?

A. High barriers to entry
B. High degree of concentration
C. Short lead time to build new plants

A

C. Overcapacity & Lower Profits

Contrast/+-/POE

A: -ve for new entrants= high ROC

B: high conc= few players= -ve for new entrants= high ROC

C: With short lead times, industry capacity can be rapidly
increased to satisfy demand, but it may also lead to overcapacity and lower profits.

120
Q

An industry with high barriers to entry and weak pricing power most likely has?

A. high barriers to exit.
B. stable market shares.
C. significant numbers of issued patents.

A

A.

An industry that has high barriers to entry generally requires substantial physical capital and/or financial investment.

With weak pricing power in the industry, finding a buyer for excess capacity (i.e., to exit the industry) may be difficult.

121
Q

Economic value is created for an industry’s shareholders when the industry earns a return:

A. below the cost of capital.
B. equal to the cost of capital.
C. above the cost of capital.

A

C.

Economic profit is earned and value created for shareholders when the company earns returns above the company’s cost of capital.

122
Q

Which of the following industries is most likely to be characterized as concentrated with strong pricing power?

A. Asset management.
B. Alcoholic beverages.
C. Household and personal products.

A

B.

As displayed in Exhibit 4, the alcoholic beverage industry is concentrated and possesses strong pricing power.

123
Q

With respect to competitive strategy, a company with a successful cost leadership strategy is most likely characterized by:

A. a low cost of capital.
B. reduced market share.
C. the ability to offer products at higher prices than competitors

A

A.

Companies with low cost strategies must be able to invest in productivity-improving equipment and finance that investment at a low cost of capital.

Market share and pricing depend on whether the strategy is pursued defensively or offensively.

124
Q

When conducting a company analysis, the analysis of demand for a company’s product is least likely to consider the:

A. company’s cost structure.
B. motivations of the customer base.
C. product’s differentiating characteristics.

A

A.

The cost structure is an appropriate element when analyzing the supply of the product, but analysis of demand relies on the product’s differentiating characteristics and the customers’ needs and wants.

125
Q

Which of the following statements about company analysis is most accurate?

A. The complexity of spreadsheet modeling ensures precise forecasts of financial statements.
B. The interpretation of financial ratios should focus on comparing the company’s results over time but not with competitors.
C. The corporate profile would include a description of the company’s business, investment activities, governance, and strengths and weaknesses.

A

C is correct.

A: all based on ESTIMATES; never precise.

B: comps analysis is done

C: true

The corporate profile would provide an understanding
of these elements.

126
Q
A

EQUITY_CFA1 (8 decks)

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