Reading 40: introduction to industry and analysis Flashcards
Industry classification systems from commercial index providers typically classify firms by:
statistical methods.
products and services.
business cycle sensitivity.
The classification systems provided by S&P/MSCI Barra, Russell, and Dow Jones/FTSE classify firms according to the product or service they produce. (LOS 40.d)
Firms and industries are most appropriately classified as cyclical or non-cyclical based on:
their stock price fluctuations relative to the market.
the sensitivity of their earnings to the business cycle.
the volatility of their earnings relative to a peer group.
For industry analysis, cyclical firms and industries are those with earnings that are highly dependent on the business cycle, while non-cyclical firms and industries are those with earnings that are relatively less sensitive to the business cycle. (LOS 40.c)
An analyst should most likely include two firms in the same peer group for analysis if the firms:
are both grouped in the same industry classification.
are similar in size, industry life-cycle stage, and cyclicality.
derive their revenue and earnings from similar business activities.
Firms should be included in a peer group if their business activities are comparable. An analyst may begin with available industry classifications when forming peer groups but should refine them based on factors including the firms’ sources of demand and earnings and the geographic markets in which they operate. (LOS 40.e)
The industry experience curve shows the cost per unit relative to:
output.
age of firms.
industry life-cycle stage.
The experience curve shows the cost per unit relative to output. Unit cost declines at higher output volume because of increases in productivity and economies of scale, especially in industries with high fixed costs. (LOS 40.f)
Which of the following is least likely an element of an industry strategic analysis?
Market correlations.
Demographic influences.
Influence of industry capacity on pricing.
Elements of an industry strategic analysis include the major firms, barriers to entry/success, industry concentration, influence of industry capacity on pricing, industry stability, life cycle, competition, demographic influences, government influence, social influence, technological influence, and whether the industry is growth, defensive, or cyclical. (LOS 40.g)
Two of the five competitive forces in the Porter framework are:
threat of entry and barriers to exit.
power of suppliers and threat of substitutes.
rivalry among competitors and power of regulators.
Porter’s five forces are rivalry among existing competitors, threat of entry, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers. (LOS 40.g)
Greater pricing power is most likely to result from greater:
unused capacity.
market concentration.
volatility in market share.
Greater concentration (a small number of firms control a large part of the market) typically reduces competition and results in greater pricing power. Greater unused capacity in an industry, especially if chronic, results in greater price competition and less pricing power. Greater stability in market share is typically associated with greater pricing power. (LOS 40.h)
Which of the following statements best describes the relationship between pricing power and ease of entry and exit? Greater ease of entry:
and greater ease of exit decrease pricing power.
and greater ease of exit increase pricing power.
decreases pricing power and greater ease of exit increases pricing power.
In industries with greater ease of entry, firms have little pricing power because new competitors can take away market share. High costs of exiting result in overcapacity and likely price wars. Greater ease of exit (i.e., low costs of exit) increases pricing power. (LOS 40.h)
Industry overcapacity and increased cost cutting characterize which stage of the industry life cycle?
Growth.
Shakeout.
Maturity.
The shakeout stage is characterized by slowed growth, intense competition, industry overcapacity, increased cost cutting, declining profitability, and increased failures. (LOS 40.i)
In which of these characteristics is the oil producing industry most likely similar to the home building industry?
Industry concentration.
Demographic influences.
Business cycle sensitivity.
Oil production and home building are both highly cyclical industries. Oil production is dominated by a small number of large global firms, while home construction is characterized by a large number of relatively smaller firms. Demographics have more influence on housing construction (e.g., the rate of new household formation) than on oil production. (LOS 40.k)
Which of the following is least likely a significant external influence on industry growth?
Social influences.
Macroeconomic factors.
Supplier bargaining power.
Supplier bargaining power is best characterized as a force internal to the industry. External influences on industry growth, profitability, and risk include macroeconomic, technological, demographic, governmental, and social influences. (LOS 40.j)
Which of the following best describes a low-cost competitive strategy?
Volume sold is typically modest.
Managerial incentives promote operational efficiency.
Success depends heavily on creative marketing and product development.
Firms that use a low-cost strategy should have managerial incentives suitable to create efficient operations. In a low-cost strategy, the firm seeks to generate high enough sales volume to make a superior return. Marketing and product development are key elements of a differentiation strategy. (LOS 40.l)
