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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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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)

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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 Margaret's statements only.

C) William and Maria's statements only.

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William and Maria's statements support arguments for rivalry among commercial banks in that they indicate that banks must increase market share through mergers and acquisitions and that traditional banking activities are now commodities. Margaret's statement suggests that banks are offering increasingly diverse products in an attempt to differentiate – the opposite of a commodity-type business.

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

• Auto manufacturers are relying on Tier 1 suppliers for more and more sub-assembly work and quality control and testing.
• The additional subassembly work facilitates specialization among suppliers and allows them to resell their expertise to other auto manufacturers.
• 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 2 and 3 only.

B) Statements 1 and 2 only.

C) Statements 1 and 3 only.

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Based on the Porter model, increased specialization and an increase in capital investment may each act to increase barriers to entry. The fact that auto manufacturers are relying more and more on their suppliers may be interpreted as an industry dynamic that would attract more competition. Finally, the negotiation for lower prices by auto manufacturers suggests that suppliers are losing some bargaining power.

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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) Bargaining power of buyers.

B) Threat of new entrants (Entry barriers).

C) Rivalry among existing competitors.

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Long drug patents make entry into the industry difficult; therefore this relates to barriers to entry

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

A) bargaining power of buyers.

B) threat of substitute products.

C) threat of new entrants.

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Substitute products limit the profit potential of an industry.  Why?  They limit the prices firms can charge.  There will be higher levels of competition and lower profit margins for more commodity-like products.

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

A) Threat of substitute products.

B) Bargaining power of the firm's creditors.

C) Rivalry among existing competitors.

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The bargaining power of the firm’s customers and suppliers along with the threat of substitute products, the threat of new entrants, and the rivalry among existing competitors comprise Porter’s five factors. The bargaining power of the firm’s creditors is not one of Porter’s five factors.

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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.

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The key concern of industry attractiveness is whether the industry is attractive in terms of long-term profit potential.

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

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

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

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

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All else equal, high barriers to entry, low barriers to exit, and high switching costs will tend to result in higher profitability for a firm in a competitive industry.

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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.





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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.