BUS 345 ch3
Competitive industry structure refers to elements and features common to
all industry
Rule of thumb for Porters 5 forces
, the stronger the five forces in an industry, the lower the industry's profit potential—making the industry less attractive for competitors. The reverse is also true: the weaker the five forces, the greater the industry's profit potential—making the industry more attractive.
Barrier of Exit
- Economic Factor &Social Factor - Fixed cost must be paid regardless of whether co is operating in the industry or not - Social factor - include emotional attachment to certain geographic location - Co exiting may have contractual obligation to supplier, such as employee health care & retirement benefit, as well as severance pay
Industry analysis involves
1) defining the relevant industry 2 identifying key players in each of the five forces 3 identifying the underlying drivers of each force, 4. assessing the overall industry structure 5. drawing a strategic group map
Which of the following statements with regard to industry structures is true?
A consolidated industry tends to be more profitable than a fragmented one.
Which of the following firms will most likely not be a complementor to a firm that manufactures computers? A company that
A. Company develop operating software B. develop application software c. manufactures its own brand D. manufacture portable external disk ANS: C
Beans Inc. operates in a perfectly competitive agricultural industry. Classica Apparel Inc., in contrast, operates in a monopolistically competitive industry. Keeping this information in mind, which of the following statements is true?
B. While Classica Apparel Inc. will have the power to set the prices for its products, Beans Inc. will have little or no ability to do so.
Soapsuds Inc., a manufacturer of cleaning agents, supplies its products to All Needs Inc., a supermarket chain. It demands that All Needs create more shelf space in its stores for Soapsuds' products. However, All Needs Inc. refuses to do this. Instead, it decides to produce its own range of cleaning agents with its own label "All Wash." In this scenario, All Needs Inc. has exercised its bargaining power as a buyer through
Backward Integration - Buyers are powerful when they can credibly threaten backward integration
Which of the following factors best contributes to the U.S. automotive industry being characterized by high entry barriers?
C. Car manufacturers require large-scale production in order to be cost-competitive.
A new company named Far Reach Inc. entered the radio retail business. In response, two incumbent radio retailers, Smooth Waves and Clear Signal, lowered the cost of their travel alarm radios and long-distance radios. Also, they spent more money to improve these radios. By doing this, Smooth Waves and Clear Signal
C. decreased industry profit potential.
_____ is best described as cooperation by competitors to achieve a strategic objective.
Co-operation
Which of the following statements about Porter's five forces model is accurate?
Competition must be defined in a broad way to incorporate all of the key factors that influence profit potential.
A firm's strategic position relates to its ability to create value for customers (V) while containing the cost to do so (C).
Competitive advantage flows to the firm that is able to create as large a gap as possible between the value the firm's product or service generates and the cost required to produce it (V C).
hile implementing strategic group mapping for the U.S. domestic airline industry, two strategic groups become apparent: low-cost, point-to-point airlines (Virgin Atlantic, Alaska Airlines, JetBlue, and Southwest Airlines) versus differentiated airlines using a hub-and-spoke system (American, Delta, and United). Which of the following statements is true about these two strategic groups?
Competitive rivalry between Virgin Atlantic and JetBlue is likely to be higher than that between American and Southwest Airlines.
Demand for traditional fast-food providers such as McDonald's, Burger King, and Wendy's has been on a decline in recent years. Consumers have become more health conscious and demand has shifted to alternative restaurants like Subway, Chick-fil-A, and Chipotle. Attempts by McDonald's and Wendy's to steal customers from one another include frequent discounting tactics such as dollar menus. Such competitive actions are indicative of
Cutthroat competition
How did Virgin America enter the airline industry despite the industry's notoriously low profitability?
D. Virgin America offered low-cost service between major metropolitan cities on the American East and West coasts.
Given the industry structure in the automobile business, entering the auto manufacturing industry doesn't seem advisable. Yet Tesla Motors is joining the fray. Rather than attempting to compete head-on in internal combustion engines, Tesla Motors is entering the all-electric car segment, a much less crowded niche in the overall car industry. Which of the following is Tesla most hoping to benefit from in this market niche?
Economies of Scale
n the aircraft manufacturing industry, at least for large commercial jets, Boeing and Airbus are the only competitors. There is not a significant threat of entry because
Entering aircraft manufacturing industry require huge capital investment
How do low interest rate affect a business
Firm can easily borrow money to finance future growth - Borrowing at lower rates reduces the cost of capital and enhances a firm's competitiveness.
A fragmented industry is made into a consolidated industry
Horizontal merger and acquisition - Since a consolidated industry tends to be more profitable than a fragmented one, firms have a tendency to change the industry structure in their favor, making it more consolidated through (horizontal) mergers and acquisitions.
threat of entry is high when capital requirements are low in comparison to the expected returns.
If an industry is attractive enough, efficient capital markets are likely to provide the necessary funding to enter an industry. Capital, unlike proprietary technology and industry-specific know-how, is a resource that can be relatively easily acquired in the face of attractive returns.
Potential new entries in an industry decrease profit potential in 2 major ways
Incumbent firms may lower prices to make entry appear less attractive to the potential new competitors. Incumbent firms may spend more to satisfy their existing customers.
With the emergence of smartphones, users no longer have to carry a separate music player, a video game, a laptop, or a magazine to keep themselves entertained when traveling. A smartphone is loaded with a variety of applications to satisfy all the customer needs that different industries or products individually satisfied earlier. As a result, the smartphone industry has been posing a threat to a lot of other unrelated industries. What is this phenomenon best known as?
Industry convergence
What is the primary feature of the 5 forces model
It views competition within an industry broadly to include forces such as buyers, suppliers, and the threat of substitutes
____ are best described as industry-specific factors that separate one strategic group from another.
Mobility barriers
n Rozinia Republic, the federal government owns and manages all the nuclear power plants. This is because the business would not be profitable if there was more than one supplier in the nuclear power industry. Which of the following industry competitive structures does the scenario best illustrate?
Natural Monopoly - governments believe without natural monopoly the market would not supply these products or services at all. -Public utilities supplying water, gas, and electricity to businesses and homes are frequently monopolists. These are so-called natural monopolies.
Which of the following is an accurate statement about near monopolies?
Near monopolies are firms that have accrued significant market power and thereby are changing the industry structure in their favor.
Clear Calls Inc., a telephone service provider, has a large user base mainly because phone calls and messages between all Clear Calls users are free. When a person switches to a Clear Calls network, his or her entire network of family and friends is likely to switch to the same network to avail the benefit of free calls and messages. In addition, an existing user who gets a new user to register with Clear Calls Inc. is given a free wireless connection. This has helped to keep competition away from Clear Calls. In this scenario, which of the following factors is acting as an entry barrier for Clear Calls Inc.?
Network Effect - acting as an entry barrier for Clear Calls Inc. Network effects describe the positive effect (externality) that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users.
Pure Carat Inc. is a company that sells 24-carat gold biscuits to companies that manufacture jewelry. Since the company operates in an industry where many other suppliers sell standardized products, it can most likely
Only achieve competitive parity
Competitive parity
Operate in an industry where many other suppliers sell standardized product
The _____ allows the scanning, monitoring, and evaluating of changes and trends in a firm's macro environment.
PESTEL Framework
Competitive rivalry based solely on _____ is destructive to firms as it transfers most of the value created in the industry to the customers.
Price cutting
In the smartphone industry, Google is a complementor to Samsung. Which of the following statements best explains why this is true?
Samsung's smartphones increase in value when they are preinstalled with Google's Android system
While industry forces have been favorable for a long time in the U.S. automotive industry, recent dynamics have lowered the profit potential of competing in this industry and thus reduced its attractiveness. The continued success of Tesla Motors in the industry will depend on other firm and industry factors. Which of the following represents one such factor that directly affects Tesla Motors?
Since suppliers of its key sources are few, the bargaining power of suppliers is high - battery back bargaining power of supplier
Which of the following is a characteristic of a fragmented industry?
There are many small firms & tend to generate low profitability
Home Savings, Good Deals, Hank's Store, and King Bargains are all departmental stores that compete for advantage against each other through everyday low-pricing and discounts on bulk purchases. All four stores cater to the needs of highly price-sensitive customers. Thus, together Home Savings, Good Deals, Hank's Store, and King Bargains form a
Strategic group
Which of the following forces was not originally a part of Michael Porter's fives forces model
Strategic role of complement
In which of the following situations is the power of suppliers high in an industry?
Supplier industry is more concentrated than the industry it sells to
Which of the following is an implication of high exit barriers in an industry
The industry will face excess capacity.
hile Burger Cult Inc. operates in a monopolistically competitive industry, Citizen Telecom Inc. operates in a monopoly. Keeping this information in mind, which of the following statements is most likely true?
The threat of new entrants will be higher for Burger Cult Inc. than Citizen Telecom Inc
Earlier, the travel industry was controlled by a few large travel companies that booked holidays, air tickets, bus tickets, and hotels for their customers. However, with the emergence of the Internet, smaller travel agencies started mushrooming in the industry and customers started making their own reservations. Which of the following can be inferred from this information?
The travel industry changed from a consolidated structure to a fragmented one.
What is the rule of thumb behind Porter's five forces model?
The weaker the five forces, the greater the industry's profit potential—making the industry more attractive.
- Profitability varies between different strategic group
This difference implies that firm performance is determined not only by the industry to which the firm belongs, but also by its strategic group membership.
When fashion magazines face competition from fashion blogs on the web, which of the following forces in Michael Porter's five forces model primarily gets stronger?
Threat of Substitute
How are cumulative learning and experience effects of a company most likely to affect Michael Porter's five forces?
Threat of new entrants will be low
Which of the following would most likely not indicate that sellers are a strong competitive force in an industry?
When buyer cost of switching to substitute is low
Which of the following is the best characterization of sociocultural forces?
a society's culture, norms, and values
sociocultural factors
age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class. - capture a society's cultures, norms, and values
Backward integration
buyer moves upstream in the industry value chain, into the seller's business.
Perfect Competitive industry
characterized as fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices.
Monopolistic Competitive Industry
characterized by many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers.
Samsung and Google cooperate as complementors to compete against Apple's strong position in the mobile device industry, while at the same time Samsung and Google are increasingly becoming competitive with one another. This scenario best illustrates the process of
co-operation
Which of the following strategies will be most detrimental to firms that are close rivals operating in an oligopolistic industry structure?
competing against each other through price-cutting -process initiates a price war, which can be especially detrimental to firm performance if the products are close rivals. Therefore, non-price competition is the preferred mode of competition.
SooGood Inc. produces a dip that goes extremely well with Crunchy Potato Chips Inc. SooGood Inc., therefore, is a _____ of Crunchy.
complementor
Which of the following is an implication of low interest rate
consumer demand will increase
Economies of Scale
cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers
What is the first step to applying five forces model?
defining relevant industry
In a firm's external environment, _____ primarily capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class.
demographic trends
How can a firm change its industry structure from monopolistically competitive or oligopolistic to a near monopoly?
developing proprietary technology
Companies in the same strategic group are _____ to each other
direct competitors - rivalry among firms of the same strategic group is generally more intense than the rivalry between strategic groups: intra-group rivalry exceeds inter-group rivalry.
What is the final step to applying five forces model
draw a strategic group map
Which of the following do the sociocultural forces in a firm's external environment best represent?
family size of the firms target market - age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class.
Industry convergence is a process whereby
formerly unrelated industries begin to satisfy the same customer need. - a process whereby formerly unrelated industries begin to satisfy the same customer need. - brought on by technological advance
In an industry, the rivalry among existing competitor is high when
incumbent firm are highly commited to the business
Switching cost
incurred by moving from one supplier to another. Changing vendors may require the buyer to alter product specifications, retrain employees, and/or modify existing processes.
The Beacon is a newspaper that sold print copies of its paper in a medium-sized town in Kansas for more than 100 years. Recently, the Beacon signed a deal with IntelNews Inc. to present the paper digitally to homes and businesses. This example shows
industry convergence
Economic growth rate
is a measure of the change in the amount of goods and services produced by a nation's economy. It indicates what stage of the business cycle the economy is in—that is, whether business activity is expanding (boom) or contracting (recession).
Economies of scale are cost advantages that accrue for firms with
larger output - can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers
Which of the following is a macroeconomic factor that can affect a firm's strategy
level of employement
Quick Market Inc. is a food supply company that wants to sell its products directly to consumers through mail order instead of going through supermarkets and other stores. However, supermarket chains want to make this transaction either illegal or more difficult for Quick Market. To accomplish this, they are using _______ to influence the political process
lobbying forces - Many large companies use powerful lobbying forces to influence the political process.
Threat of Entry by additional competitor
may force incumbent firms to spend more to satisfy their existing customers. Larger investments in value creation further reduce an industry's profit potential if prices cannot be raised.
An industry has many firms that compete in it. While products between competitors tend to be similar, they are by no means identical. As a consequence, managers selling a product with unique features tend to have some ability to raise prices. This type of industry is an example of
monopolistic competition - Monopolistic competition has many firms, some pricing power, and differentiated product
Curry Rush is a premium Asian restaurant chain that differentiates itself from a large number of competitors by providing exclusively organic Vietnamese cuisine. It has some pricing power because it provides differentiated products and therefore, has some entry barriers in place. In this scenario, Curry Rush is most likely operating in a(n)
monopolistic competitive industry
Which type of industry structure is often analyzed using game theory?
oligopolistic - which attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated.
Which of the following is likely to happen due to horizontal mergers between competitors such as Delta and Northwest airlines?
overall industry profitability will increase
Network effect
positive effect that one user of a product or service has on the value of that product or service for other users
Shield Autos Inc. has newly launched a luxury car into the European market. Which of the following would most likely not be a complement to the car?
premium car manufactured and sold by Mova Autos Inc., a rival company - A premium car manufactured and sold by Mova Autos Inc. will be a substitute, not a complement. A complement is a product, service, or competency that adds value to the original product offering when the two are used in tandem
A firm's _____ relates to its ability to create value for customers (V) while containing the cost to do so (C).
strategic positioning
The relative bargaining power of suppliers is high when
suppliers offer products that are differentiated and when suppliers do not depend heavily on the industry for a large portion of their revenues.
First Ledger Inc., an auditing company, replaced its existing accounting software with new accounting software from another supplier. Since the new software has different features and abilities, First Ledger Inc. has had to spend $10,000 on training its employees to use it. In this scenario, $10,000 represents First Ledger Inc.'s
switching cost
A firms strategic position is likely to be strong when
the gap between the value the firm's product generates and the cost to produce it is large.
Threat of substitute
the idea that products or services available from outside the given industry will come close to meeting the needs of current customers. The threat of substitutes is high when the substitute offers an attractive price-performance trade-off or when the buyer's cost of switching to the substitute is low.
Peerless Inc., a large conglomerate, wants to liquidate its business in certain industries to improve its overall profitability. Which of the following industries would Peerless Inc. find it most difficult to exit?
the steel industry in which the company has obligations like severance pay toward employees
buyers are highly price sensitive when
they earn low profits or are strapped for cash.
The telecom industry in the country of New Taria is an industry characterized by the presence of strong network effects, high brand loyalty, high economies of scale, and proprietary technology among incumbent firms. Thus, in the telecom industry, the
threat of new entrants is most likely low
Why do companies use strategic group models?
to reveal performance difference between cluster of firms in the same industry
Inflation
too much money in the economy - go along with higher interest rates and lower economic growth.
which of the following represent economic factor in a firms external general environment?
stage of the business cycle that the country is in
The porter 5 forces is to
understand the profit potential of different industries
Which of the following features about a buyer indicates that the buyer has high bargaining power?
when the buyer operates in an industry where products are undifferentiate
How is a firm's task environment different from its general environment?
Managers have some influence over external factors in the task environment; they have little direct effect over external forces in the general environment
consolidated industry breaks up and become more fragmented
happens when there are external shocks to an industry such as deregulation, new legislation, technological innovation, or globalization.
oligopoly
has a few large firms, differentiated products, and high entry barriers. - competing firms are interdependent. With only a few competitors in the mix, the actions of one firm influence the behaviors of the others
Porters 5 forces
help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage.
During Period of high industry growth
price competition among firms frequently decreases. - consumer demand is rising, and price competition among firms frequently decreases. Because the pie is expanding, rivals are focused on capturing part of that larger pie rather than taking market share and profitability away from one another
Strategic Group
set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage.
strategic group
set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage. -Companies in the same strategic group are direct competitors.
Perfect Competition
- difficulty achieving even a temporary competitive advantage and can achieve only competitive parity. - ittle or no ability to raise its prices because product are identical
Why do firms operating in a monopolistically competitive industry have the power to raise the prices of their products or services?
- firm can differentiate their product offering - it carves out a niche in the market in which it has some degree of monopoly power over pricing, thus the name "monopolistic competition."
Barriers of Exit
- low exit barriers is attractive because it allows underperforming firms to exit more easily. = reduces competitive pressure on the remaining firms because excess capacity is removed. - high exit barriers reduces its profit potential because excess capacity still remains
Corner Market Inc. is a supermarket chain. Due to strong competition from other stores in the industry, Corner Market has aggressively used branding, pricing, and superior customer service to uniquely position itself in the market. As a result, the supermarket chain has been able to differentiate itself from its competitors and sell its products at higher prices. Which of the following industry competitive structures does this scenario best illustrate
- monopolistic competition
External Factor
-composition of the strategic group to which the firm belongs -environment are ones that managers do have some influence over, such as the composition of their strategic groups (a set of close rivals) or the structure of the industry.
When is the rivalry among existing competitors in an industry likely to be more intense?
-when firms make strategic commitments to compete in an industry. rivalry is liekly to be more intense
n the _____ developed by Michael Porter, competition is not defined narrowly as a firm's closest competitors but rather more broadly to include other factors in an industry like buyers, suppliers, potential new entry of other firms, and the threat of substitutes.
5 forces
Keeping in mind the five forces in the airline industry, which of the following best explains the situation in the industry?
A. Substitutes are readily available in the form of trains and buses, thus reducing the profit potential in the industry. - If prices are seen as too high, customers can drive their cars or use the train or bus.
Which of the following fundamental insights was provided by Porter's five forces framework from the completion of the Alta Velocidad Española (AVE) in 2008?
Any of the five forces on its own, if sufficiently strong, can extract industry profitability - First, competition must be defined more broadly to go beyond direct industry competitors. Second, any of the five forces on its own, if sufficiently strong, can extract industry profitability.
In 2008, BlackBerry's market cap peaked at $75 billion. By 2015 this valuation had fallen more than 90 percent, to less than $7 billion. BlackBerry fell victim to two important PESTEL factors in its external environment: sociocultural and technological. How did technology contribute to BlackBerry's decline?
BlackBerry failed to change its device into one that could perform multiple tasks effectively
A company is best described as a _____ to an existing company if customers value the existing company's product or service offering more when they are able to combine it with the other company's product or service.
Complementor
Which of the following is an example of monopolistic competition?
Computer hardware
The government of Filvia has mandated that the standard minimum wage in the country be increased to $8,000 per year. This has ensured that all firms in the country pay their employees at least $8,000 per year, which has brought about a higher standard of living for the people of Filvia. Which of the following factors in a firm's general environment does this mandate best indicate?
Legal factor
Which of the following is a drawback of Porter's five forces model?
Managers cannot determine the changing speed of an industry or the rate of innovation. - This drawback implies that managers must repeat their analysis over time in order to create a more accurate picture of their industry.
Eon Inc., Electravia Inc., and FC Inc., the three largest firms in the consumer electronics industry, hold close to 85 percent of the industry's market share. These companies mainly compete against each other by providing unique features in their products rather than pricing them low. These firms are interdependent, and each firm must consider the strategic actions of its competitors. Which of the following industry competitive structures does this scenario best illustrate?
Oligopoly
In which of the following industry competitive structures do selling firms have the lowest pricing power?
Perfect Competition
When companies that manufacture shipping containers want to buy iron ore, the purchase decision is solely based on price. This is because there are a large number of sellers in the iron ore industry, and iron ore is a highly undifferentiated commodity. Which of the following industry competitive structures does the iron ore industry best illustrate?
Perfect Competition
low intrest rate
When credit is cheap because interest rates are low, consumers buy homes, automobiles, computers, and even vacations on credit; in turn, all of this demand fuels economic growth. During periods of low interest rates, firms can easily borrow money to finance future growth. Borrowing at lower rates lowers the cost of capital and enhances a firm's competitiveness.