Reading 38: The Five Competitive Forces that Shape Strate

following, suppliers, industry, relying, supply

LOS b: Illustrate how the competitive forces drive industry profitability.

Q1. While Joseph Donovan, CFA, was interviewing Gene Hickman, the CEO of Hickman Supply, Hickman made the following comments on the auto supply industry:

1. Auto manufacturers are relying on Tier 1 suppliers for more and more sub-assembly work and quality control and testing.

2. The additional subassembly work facilitates specialization among suppliers and allows them to resell their expertise to other auto manufacturers.

3. The additional subassembly work requires additional capital investment and risk taking by the suppliers.

Given these statements, Donovan is most likely to conclude that barriers to entry to the auto supply industry have increased due to:

A) Statements 1 and 2 only.

B) Statements 1 and 3 only.

C) Statements 2 and 3 only.

Q2. Mary Moore is preparing a report on the commercial banking industry. As she gleaned information from the competitors annual reports she encountered the following statements in the CEO’s letters to their shareholders and the Management Discussion and Analysis (MD&A) section:

William Spencer, CEO of Western Banks, stated in the MD&A: “Consolidation within the industry will continue at its current pace, or perhaps accelerate, as banking concerns seek to increase their presence and market share.”

Margaret Acosta, CEO of Southwest Banking, stated in her letter to the shareholders: “Competition is becoming increasingly diverse as banks continue to increase in size and offer products ranging from insurance and mutual funds to high tech interaction with customers.”

Maria Bellini, CEO of Atlantic Mercantile Banks, noted in the MD&A that: “Cost advantages in most traditional banking activities seem to be mostly gone now, which will impact the industry future profitability.”

Moore is most likely to report that the commercial banking industry has high rivalry among competitors based on:

A) Margaret and Maria's statements only.

B) William and Maria's statements only.

C) William and Margaret's statements only.

Q3. Which of the following are likely to result in higher profitability for a firm in a competitive industry?

A) High barriers to entry, low barriers to exit, and high switching costs.

B) Low supplier concentration, low buyer concentration, and commoditization of the industry’s products.

C) Product differentiation, low switching costs, and high barriers to exit.

Q4. With respect to industry attractiveness, the key concern is whether the:

A) industry is currently profitable.

B) industry is attractive in terms of long-term profit potential.

C) industry is currently experiencing significant sales growth.

Q5. Which of the following is NOT one of Porter’s five factors determining the intensity of competition within an industry?

A) Bargaining power of the firm's creditors.

B) Threat of substitute products.

C) Rivalry among existing competitors.

Q6. An industry that manufactures and sells a commodity-like product will face increased competition primarily because of greater:

A) threat of substitute products.

B) bargaining power of buyers.

C) threat of new entrants.

Q7. If an analyst was assessing a pharmaceutical company’s competitive strategy, the length of the drug patent would be related to which of Porter's Five Forces?

A) Entry barriers.

B) Bargaining power of buyers.

C) Rivalry among existing competitors.