Reading 37: The Five Competitive Forces that Shape Strategy- style, drive, center, industry, 2010

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 37: The Five Competitive Forces that Shape Strategy

LOS a: Distinguish among the five competitive forces that drive industry profitability in the medium and long run.

 

 

 

Which of the following is NOT one of Porter's five competitive forces that determines the attractiveness or profitability of any industry?

A) Bargaining power of buyers.

B) Industry average return on equity.

C) Entry of new competitors.

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Porter's five competitive forces are the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of customers, and the rivalry among existing competitors.

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For pharmaceutical companies, the time it takes to get a drug through the clinical trials, regulatory approval and finally to the market is approximately 12 years. In a competitive strategy analysis, this lengthy pre-product period would raise concerns about the:

A) threat of substitutes.

B) rivalry among existing suppliers.

C) bargaining power of buyers.

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It would raise concerns about the threat of substitutes. There is usually a race among pharmaceutical companies to get similar drugs through the process first, because the first drug to the market generally captures a larger market share and creates brand loyalty.

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Which of the following statements about Porter's five factors is FALSE?

A) Rivalry increases when many firms of relatively equal size compete within an industry.

B) Profitability is enhanced by increases in the bargaining power of buyers or suppliers within an industry.

C) The presence of substitute products limits the profit potential of an industry.

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If buyers bargaining power is increased, firms' profitability will decrease.

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Significant economies of scale in an industry will reduce industry competition by reducing the:

A) bargaining power of suppliers.

B) threat of substitute products.

C) threat of new entrants.

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Potential new entrants to an industry are discouraged from entering the market, by things like barriers to entry and economies of scale.  Because new entrants represent increased competition, the lack of new entrants will reduce industry competition.

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Which of the following is NOT one of Porter’s five factors used to determine industry competition?

A) Bargaining power of buyers.

B) Rivalry among existing competitors.

C) Purchasing power of consumers.

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Purchasing power of consumers is not one of the five forces that Porter believes to determine the intensity of competition within an industry. The other two choices are, along with the threat of new entrants and the threat of substitute products.

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Which of the following factors associated with industry competition affect the performance of a firm within that industry?

A) Industry operating leverage.

B) Threat of new entrants.

C) The industry's stage in its life cycle.

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New entrants represent increased competition and lower profitability.

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Which of following is NOT one of Michael Porter’s factors used to determine competition in an industry?

A) Economies of scale.

B) Threat of substitute products.

C) Bargaining power of buyers.

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Porter’s five forces are: rivalry among current competitors, threat of new entrants, threat of substitutes, bargaining power of suppliers, and bargaining power of buyers. Economies of scale are a way to lessen the threat of new entrants, but are not the only way to discourage competition.

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Daniel Tipton and Jesse Torrez are first-year MBA students at the Haas School of Business. Torrez has an economics background, but Tipton’s background is in music. To help Tipton study one of the main tenets of competition theory, Torrez creates the following question and asks Tipton to identify the statement that is most inconsistent with Porter’s five forces. Which statement should Tipton select?

A) Porter's five forces are: rivalry among current competitors, economies of scale, threat of substitutes, bargaining power of suppliers, and bargaining power of buyers.

B) Supplier power is higher when there are only a few suppliers to an industry.

C) To sustain above average returns on invested capital, firms should strive for economies of scale.

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Porter’s five forces are: rivalry among current competitors, threat of new entrants, threat of substitutes, bargaining power of suppliers, and bargaining power of buyers. Economies of scale are a way to lessen the threat of new entrants, but are not the only way to discourage competition. Companies can also have barriers to entry such as regulation or high start up capital. The other choices are true.

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Which of following is NOT one of Michael Porter’s factors used to determine competition in an industry?

A) Threat of new entrants into the market.

B) Capital structure and financial flexibility.

C) Bargaining power of the firm with its suppliers.

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Porter’s competitive factors are: rivalry among the existing competitors; threat of new entrants; threat of substitute products; bargaining power of buyers; bargaining power of suppliers.

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Porter’s five factors for determining the intensity of competition within an industry are least likely to include:

A) bargaining power of buyers.

B) regulatory environment.

C) threat of new entrants.

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Porter’s five factors are: rivalry among the existing competitors, threat of new entrants, threat of substitute products, bargaining power of buyers, and bargaining power of suppliers.