Industry and Competitive Analysis

Question 1

What is the purpose of industry and competitive analysis?

Answer 1

To analyze industry size, profits, market share, and determine a company’s position within its industry.

Question 2

What factors influence long-run profitability in different industries?

Answer 2

Opportunities available and risks to which they are exposed.

Question 3

What typically drives company profitability over time?

Answer 3

Competition tends to drive company profitability toward an industry base rate.

Question 4

What are the reasons for differences in profitability among participants in an industry?

Answer 4

Differences in business model, company size, and competitive strategy.

Question 5

What is the role of industry and competitive analysis?

Answer 5

To determine an industry’s base rate of profitability and factors affecting that rate.

Question 6

How can industry analysis improve financial forecasts?

Answer 6

By examining industry drivers and compiling industry-wide data.

Question 7

What are the five steps involved in industry and competitive analysis?

Answer 7

• Define the industry
• Survey the industry
• Analyze the industry structure
• Examine external influences
• Analyze companies’ competitive strategies

Question 8

What is the first step in industry and competitive analysis?

Answer 8

Define the industry.

Question 9

What is the second step in industry and competitive analysis?

Answer 9

Survey the industry in terms of its size, growth rate, profitability, and trends.

Question 10

What framework is used to analyze industry structure?

Answer 10

Porter’s five forces.

Question 11

What external influences should be examined in industry analysis?

Answer 11

Political, economic, social, technological, legal, and environmental impacts (PESTLE).

Question 12

What is the Global Industry Classification Standard (GICS)?

Answer 12

A system developed by S&P Dow Jones Indices and MSCI to classify public companies.

Question 13

What are the hierarchical structures of industry classification systems?

Answer 13

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

Question 14

What is the Herfindahl-Hirschman Index (HHI)?

Answer 14

A measure of industry concentration calculated as the sum of the squares of market shares of all participants.

Question 15

What does an HHI of less than 1,500 indicate?

Answer 15

Low concentration in the industry.

Question 16

What is the difference between growth industries and mature industries?

Answer 16

Growth industries have considerable growth potential; mature industries have little or no growth potential.

Question 17

What is return on invested capital (ROIC)?

Answer 17

An after-tax metric independent of capital structure used to measure industry profitability.

Question 18

How is market share calculated?

Answer 18

A company’s annual revenues divided by the industry size.

Question 19

What are the five forces in Porter’s Five Forces framework?

Answer 19

• Rivalry among existing competitors
• Threat of entry
• Threat of substitutes
• Power of buyers
• Power of suppliers

Question 20

What increases rivalry among existing competitors?

Answer 20

Many firms of relatively equal size competing and slow industry growth.

Question 21

What factors can discourage new entrants into an industry?

Answer 21

Significant barriers to entry such as large capital outlays.

Question 22

What is the impact of substitute products on an industry?

Answer 22

They limit the profit potential and prices firms can charge.

Question 23

What influences industry profitability regarding buyers?

Answer 23

Buyers’ ability to bargain for lower prices or higher quality.

Question 24

What influences industry profitability regarding suppliers?

Answer 24

Suppliers’ ability to raise prices or limit supply.

Question 25

True or False: Industry size is the same as total annual sales of all companies in the industry.

Answer 25

False.

Question 26

What problems can arise when measuring industry size?

Answer 26

Involvement of private companies and unincorporated businesses, making data gathering difficult.

Question 27

What is the significance of analyzing market share trends?

Answer 27

It indicates whether a company's products are viewed favorably by customers.

Question 28

Fill in the blank: A firm with multiple business lines is classified in the one that comprises more than ______ of total revenue.

Answer 28

60%

Question 29

What are some potential limitations of classification systems?

Answer 29

* Inappropriate groupings * Companies selling multiple products * Geographic considerations * Grouping changes over time

Question 30

What is the role of environmental, social, and governance (ESG) factors in company classification?

Answer 30

They can be quantified and reported as standardized ESG scores.

Question 31

What does the power of buyers influence in an industry?

Answer 31

Buyers' ability to bargain for lower prices or higher quality influences industry profitability. ## Footnote Bargaining by governments and larger health care providers can exert downward pressure even on patented drugs.

Question 32

What is the significance of the power of suppliers in an industry?

Answer 32

Suppliers' ability to raise prices or limit supply influences industry profitability. ## Footnote Suppliers are more powerful if there are few of them and their products are scarce.

Question 33

How do higher barriers to entry affect competition?

Answer 33

Higher barriers to entry reduce competition.

Question 34

What is the effect of market concentration on competition?

Answer 34

Greater concentration reduces competition, while market fragmentation increases competition.

Question 35

What happens when there is unused capacity in an industry?

Answer 35

Unused capacity results in intense price competition.

Question 36

How does stability in market share influence competition?

Answer 36

Stability in market share reduces competition.

Question 37

What is the relationship between price sensitivity in customer buying decisions and competition?

Answer 37

More price sensitivity in customer buying decisions results in greater competition.

Question 38

What does greater maturity of an industry indicate?

Answer 38

Greater maturity of an industry results in slowing growth.

Question 39

What is the threat of new entrants in the U.S. retail market?

Answer 39

Very High.

Question 40

What is the threat of substitutes for retail?

Answer 40

Low.

Question 41

What is the bargaining power of customers in retail?

Answer 41

Moderate.

Question 42

What is the bargaining power of suppliers in retail?

Answer 42

Low to Moderate.

Question 43

How would you describe rivalry among existing competitors in retail?

Answer 43

High.

Question 44

What does PESTLE analysis consider?

Answer 44

Political, economic, social, technological, legal, and environmental factors.

Question 45

What are the three sectors most exposed to political influences?

Answer 45

* Energy * Health care * Defense

Question 46

What political influence affects the energy sector?

Answer 46

Governments desire low and stable energy prices.

Question 47

How do economic influences affect businesses?

Answer 47

They can be cyclical trends or structural trends affecting financing costs, expenditures, and confidence.

Question 48

What do social influences relate to?

Answer 48

Trends in how people work, play, spend money, and conduct their lives.

Question 49

What are sustaining and disruptive innovations?

Answer 49

* Sustaining innovation: Improvements that do not fundamentally change a product * Disruptive innovation: Creates a new market or enters an existing market in a new way

Question 50

What legal influences can present risks and opportunities for businesses?

Answer 50

Changes in laws and regulations.

Question 51

What environmental influences are gaining importance?

Answer 51

Climate change and concerns about environmental sustainability.

Question 52

What is an intentional competitive strategy?

Answer 52

A carefully planned strategy that follows cycles of execution and evaluation.

Question 53

What are the three types of competitive strategies identified by Porter?

Answer 53

* Cost leadership strategy * Differentiation strategy * Focus strategy

Question 54

What characterizes a cost leadership strategy?

Answer 54

Lowest costs of production, lowest prices, and generating superior returns.

Question 55

What is essential for a differentiation strategy to succeed?

Answer 55

The cost of differentiation must be less than the price premium buyers are willing to pay.

Question 56

What does a focus strategy entail?

Answer 56

Targeting a niche market, incorporating elements of both cost leadership and differentiation.

Question 57

What are the means of executing a cost leadership strategy?

Answer 57

* Economies of scale from fixed costs * Favorable access to raw materials * Culture of strict cost control * Aggressive pricing * Low-cost distribution

Question 58

What risks are associated with a cost leadership strategy?

Answer 58

* Cost inflation * Technological change * Imitation by competitors

Question 59

What factors may risk a differentiation strategy?

Answer 59

* Pricing premium becomes too high * Imitation by competitors * Buyers become sophisticated

Question 60

What is a potential risk of a focus strategy?

Answer 60

Larger competitors outcompete on price.