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Reading 39: The Five Competitive Forces that Shape Strategy-

Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 39: The Five Competitive Forces that Shape Strategy

LOS c: Describe why industry growth rate, technology and innovation, government, and complementary products and services are fleeting factors rather than forces shaping industry structure.

 

 

Strawline, Inc. manufactures straws using a new technology which allows straws to be made with an 11% reduction in costs. According to Porter’s model, which of the following is most likely?

A)
Any initial advantage will eventually be eliminated as competitors adopt the same technology.
B)
Strawline’s increased profit margins will allow it to increase financial leverage.
C)
Strawline’s increased profit margins will allow it to decrease financial leverage.


 

New technology does not offer a lasting advantage since the technology is available to all of Strawline’s current and potential competitors.

Joel Mason, owner of a ball-bearing factory in Cleveland, finds two interesting stories while reading The Wall Street Journal at breakfast. He reads that the government instituted a tariff on imported bearings, and that overall sales of ball bearings in the region rose 18% over the last year. Of the two changes mentioned above, which are likely to have a positive effect on Mason’s company over the long run?

A)
Neither of them.
B)
The newly passed tariff.
C)
The higher industry growth rate.


Neither of the issues presented are likely to have any long-term effect on the company, as the market generally responds to such changes and finds a new equilibrium. High growth rates tend to attract more competitors, and the effectiveness of tariffs is questionable even in the short term.

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