pacmandefense

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

A) Capital structure and financial flexibility.

B) Threat of new entrants into the market.

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.

pacmandefense

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

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

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.

pacmandefense

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

A) Threat of substitute products.

B) Bargaining power of buyers.

C) 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

pacmandefense

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

A) Industry operating leverage.

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

C) Threat of new entrants.

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New entrants represent increased competition and lower profitability.

pacmandefense

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

A) Purchasing power of consumers.

B) Bargaining power of buyers.

C) Rivalry among existing competitors.

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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.

pacmandefense

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

A) Purchasing power of consumers.

B) Bargaining power of buyers.

C) Rivalry among existing competitors.

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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.

pacmandefense

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

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

B) Rivalry increases when many firms of relatively equal size compete 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.

pacmandefense

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

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

B) Rivalry increases when many firms of relatively equal size compete 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.

pacmandefense

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.

pacmandefense

Mary Smith, a Level II CFA candidate, was recently hired for an analyst position at The Bank of Ireland. Her first assignment is to examine the competitive strategies employed by various French wineries. Smith is eager to impress her boss, Ron VanDreisen, and has taken care to make sure she is following the CFA Institute Standards of Practice when writing her research report.
Smith’s report identifies four wineries that are the major players in the French wine industry. Key characteristics of each are cited below in Figure 1.

Figure 1: Characteristics of Four Major French Wineries

	South Winery	North Winery	East Winery	West Winery
Founding Date	1750	1903	1812	1947
Generic Competitive Strategy	?	Cost Leadership	Cost Leadership	Cost Leadership
Major Customer Market (more than 80% concentration)	France	France	England	USA
Production Site	France	France	France	France

In the body of Smith’s report, she includes a discussion of the competitive structure of the French wine industry. She notes that over the past five years, the French wine industry has not responded to changing consumer tastes. Profit margins have declined steadily and the number of firms representing the industry has decreased from 10 to 4. It appears that participants in the French wine industry must consolidate in order to survive.
Smith’s report notes that French consumers have strong bargaining power over the industry. She supports this conclusion with five key points.
Bargaining Power of Buyers

• Many consumers are drinking more beer than wine with meals and at social occasions.
• Increasing sales over the internet have allowed consumers to better research the wines, read opinions from other customers, and identify which producers have the best prices.
• The French wine industry is consolidating and consists of only 4 wineries today compared to 10 wineries five years ago.
• Over 65% of the business for the French wine industry consists of purchases from restaurants. Restaurants typically make purchases in bulk, buying 4 to 5 cases of wine at a time.
• Land where the soil is fertile enough to grow grapes necessary for the wine production process is scarce in France.

After completing the first draft of her report, Smith takes it to VanDriesen to review. VanDriesen tells her that he is a wine connoisseur himself, and often makes purchases from the South Winery. Smith tells VanDriesen, “In my report I have classified the South Winery as a stuck-in-the-middle firm. It tries to be a cost leader by selling its wine at a price that is slightly below the other firms, but it also tries to differentiate itself from its competitors by producing wine in bottles with curved necks, which increases its cost structure. The end result is that the South Winery’s profit margin gets squeezed from both sides. VanDriesen replies, “I have met members of the management team from the South Winery at a couple of the wine conventions I have attended. I believe that the South Winery could succeed at being at both a cost leadership and a differentiation strategy if they separated its operations into distinct operating units, with each unit pursuing a different competitive strategy.” Smith makes a note to do more research on generic competitive strategies to verify VanDriesen’s assertions before publishing the final draft of her report.If the French home currency were to greatly appreciate in value compared to the English currency, what is the likely impact on the East Winery?

A) Make the firm less competitive in the English market.

B) No impact since the major market for East Winery is England, not France.

C) Make the firm more competitive in the English market.

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Foreign exchange rates can significantly affect the competitiveness and profitability for a given industry. For industries that derive a significant proportion of sales via exports, an appreciating currency is usually bad news because it makes the industry less competitive in the overseas market. In this case, the appreciating French currency makes French imports more expensive in England. (Study Session 11, LOS 39.c)

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Smith would categorize the French wine industry into which of the following life cycle phases?

A) Pioneer Phase.

B) Mature Phase.

C) Decline Phase.

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The decline life cycle phase has the following characteristics:

• Shifting tastes or technologies have overtaken the industry
• A decline in demand
• Lower profit margins
• Participants must either consolidate, reinvent themselves, or fail

(Study Session 11, LOS 38.b)

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VanDriesen tells Smith that he likes the fact that the conclusions in her report are backed up with facts, but tells her that he is concerned about the section concerning the Bargaining Power of Buyers. He says that while all of the points she listed may be factual, they do not all support her conclusion. Which of Smith’s points support the conclusion that consumers have strong bargaining power over the industry?

A) Points 2, 3, and 4.

B) Points 2 and 4.

C) Points 1, 2, and 4.

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Determinants of buyer power include buyer concentration, buyer volume, buyer information, available substitutes, switching costs, brand identity, and product differences. Point 1 addresses available substitutes, Point 2 addresses buyer information, and Point 4 addresses buyer and buyer concentration. Point 3, which addresses the number of competitors in the industry and Point 5, new entrants, may be factual statements but do not support the conclusion that consumers have strong bargaining power. (Study Session 11, LOS 36.b)

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Smith notes in her report that the West Winery might differentiate its wine product on attributes that buyers perceive to be important. Which of the following attributes would be the most likely area of focus for the West Winery to create a differentiated product?

A) The price of the product.

B) The method of delivery for the product.

C) A focus on customers aged 30 to 45.

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Product differentiation can be based on the product itself, the method of delivery, or the marketing approach. (Study Session 11, LOS 37.b)