[BUS 345] Chapter 3: The External Analysis [Quiz 2] [Practice Test]

*An industry can be defined as a group of:* *A)* companies offering products or services that are close substitutes for each other. *B)* manufacturing plants of a single company. *C)* different kinds of companies that are based in the same geographic location. *D)* companies that are different but generate similar amounts of revenues. *E)* brands that offer different products but are owned by a single firm.

*A)* companies offering products or services that are close substitutes for each other.

*Sales of complementors' products tend to:* *A)* increase sales of the industry's product. *B)* decrease sales of the industry's product. *C)* have no effect on sales of the industry's product. *D)* increase sales of substitute products. *E)* decrease sales of substitute products.

*A)* increase sales of the industry's product.

*Philip Morris capitalized on the growing health consciousness trend when it acquired Miller Brewing Company, and then redefined competition in the beer industry with its introduction of low-calorie beer (Miller Lite). This health trend represents a _____force.* *A)* social *B)* political *C)* legal *D)* technological *E)* demographic

*A)* social

*The Internet is an example of a:* *A)* technological force. *B)* social force. *C)* macroeconomic force. *D)* demographic force. *E)* global force.

*A)* technological force.

*Suppliers in an industry are most powerful when:* *A)* there are few substitutes for the products that they sell. *B)* switching costs are low. *C)* companies in the industry threaten to enter the suppliers' industry. *D)* their profitability is significantly affected by the purchases of companies in a particular industry. *E)* they refrain from entering their customers' industry because of lack of resources.

*A)* there are few substitutes for the products that they sell.

*Which of the following statements is true about rivalry in the context of established companies?* *A)* It significantly reduces the costs of established companies. *B)* It squeezes profits out of an industry. *C)* It enables companies to lower their spending on non-price-competitive strategies. *D)* It forces companies to reduce prices when it is less intense. *E)* It is unaffected by the demand conditions of an industry.

*B)* It squeezes profits out of an industry.

*Which of the following is true of growth industries?* *A)* They typically have high barriers to entry. *B)* They tend to be characterized by weak rivalry. *C)* They are characterized by low demands. *D)* They increase prices because customers are more aware of the industry's product. *E)* They inhibit the development of distribution channels.

*B)* They tend to be characterized by weak rivalry.

*The extent of rivalry among established companies is lowest when:* *A)* the industry's product is a commodity. *B)* demand is growing rapidly. *C)* exit barriers are substantial. *D)* the industry is entering a decline stage. *E)* the fixed costs are high.

*B)* demand is growing rapidly.

*Americans are currently living longer now than in the past because of advances in medicine. As a result, the sale of products that meet the needs of older individuals, such as devices that assist in walking and movement, have increased. In the context of an industry's macroenvironment, age is considered a:* *A)* technological force. *B)* demographic force. *C)* social force. *D)* political force. *E)* legal force.

*B)* demographic force.

*The threat from potential competitors is greatest in the _____ stage of the industry life cycle.* *A)* embryonic *B)* growth *C)* shakeout *D)* maturity *E)* decline

*B)* growth

*Mobility barriers:* *A)* allow industries to change their strategy and compete in that strategic group. *B)* inhibit the movement of companies between strategic groups in an industry. *C)* inhibit companies from shifting between suppliers for the raw materials. *D)* are factors that operate outside of an industry. *E)* exclude the barriers to entry into a group and the barriers to exit from a company's existing group.

*B)* inhibit the movement of companies between strategic groups in an industry.

*The level of industry demand:* *A)* has little effect on competition in the industry. *B)* is one of the determinants of the intensity of rivalry in the industry. *C)* increases when customers exit a marketplace. *D)* does not impact the market share that established companies hold. *E)* decreases the rivalry among established companies, when in decline.

*B)* is one of the determinants of the intensity of rivalry in the industry.

*The competitive structure of an industry refers to the:* *A)* number of market segments in the industry. *B)* number and size distribution of companies in the industry. *C)* number of consumers in the industry. *D)* number of manufacturing plants in the industry. *E)* number of products produced in the industry.

*B)* number and size distribution of companies in the industry.

*The bargaining power of an industry's suppliers is greater when:* *A)* the supply industry is fragmented. *B)* switching costs are high. *C)* the industry buys in large quantities. *D)* many substitutes are available *E)* firms in the industry can threaten backward vertical integration

*B)* switching costs are high.

*An industry's buyers have high bargaining power when:* *A)* they purchase in small quantities. *B)* switching costs are low. *C)* it is economically impossible for them to purchase an input from several companies at once. *D)* the supply industry depends upon buyers for a very small percentage of its total orders. *E)* the industry is a monopoly.

*B)* switching costs are low.

*Which of the following statements is true about government regulations in the context of entry barriers of an industry?* *A)* Government deregulation in an industry results in significant reduction in competition. *B)* Government regulation is not a major entry barrier for any industries. *C)* Falling entry barriers due to government deregulation results in higher competition and lower industry profit rates. *D)* The threat of new entrants reduces when the government deregulates an industry. *E)* Companies that enjoy brand loyalty and have significant scale economies are the ones who face major threat of competition due to government deregulation.

*C)* Falling entry barriers due to government deregulation results in higher competition and lower industry profit

*Which of the following industry structures is dominated by a small number of large companies?* *A)* Fragmented industry *B)* Consolidated industry *C)* Oligopoly *D)* Monopoly *E)* Sector

*C)* Oligopoly

*Due to a recent relaxation in the pollution control laws by the government, Alpha Motors has reduced the production of its electric-powered cars. The company is responding to a change in which of the following macroenvironmental forces?* *A)* Macroeconomic *B)* Demographic *C)* Political and legal *D)* Social *E)* Global

*C)* Political and legal

*Which of the following is NOT one of the factors in the economic forces of the macroenvironment?* *A)* Interest rates *B)* Inflation *C)* Regulation *D)* Currency exchange rates *E)* Economic growth rate

*C)* Regulation

*Which of the following statements is true about complementors?* *A)* Their impact on industries was first recognized by Porter's five forces model. *B)* They have little importance in high-technology industries. *C)* They have the power to impact the sales of the industry to which they supply complement products. *D)* They tend to increase the sales of the industry they are supplying complements to by producing fewer low-quality complement products. *E)* They cannot gain enough power to extract profits from the industry to which they supply complement products.

*C)* They have the power to impact the sales of the industry to which they supply complement products.

*Economies of scale can arise from:* *A)* cost reductions gained through decreased production. *B)* high prices on bulk purchases of raw material inputs and component parts. *C)* an advantage gained by spreading fixed production costs over a large production volume. *D)* increased spending on marketing and advertising activities. *E)* poor production operations.

*C)* an advantage gained by spreading fixed production costs over a large production volume.

*A consolidated industry structure:* *A)* consists of a large number of small companies. *B)* can be seen in agriculture, dry cleaning, health clubs, and real estate brokerage. *C)* consists of few companies that are in a position to determine industry price. *D)* provides no scope for oligopoly to exist. *E)* is characterized by low-entry barriers and commodity-type products.

*C)* consists of few companies that are in a position to determine industry price.

*Members of a strategic group:* *A)* compete only with members of other strategic groups. *B)* are affected by Porter's five competitive forces in the same way and to the same degree as the members of other strategic groups. *C)* follow a business model that is similar to that pursued by other companies in the group. *D)* face no threat of product substitutes from other members. *E)* move easily between groups without barriers.

*C)* follow a business model that is similar to that pursued by other companies in the group.

*In growth industries:* *A)* the intensity of rivalry is very high. *B)* technological expertise is the most important entry barrier. *C)* threat from potential competitors is typically highest. *D)* distribution channels are poorly developed. *E)* buyers are not familiar with the industry's products.

*C)* threat from potential competitors is typically highest.

*Julian was asked to examine the demographic forces facing his employer, a clothing manufacturer. Which of the following factors is Julian most likely to examine?* *A)* Government regulations *B)* Inflation *C)* Manufacturing technology *D)* Age of the population *E)* Society's growing interest in exercise

*D)* Age of the population

*Which of the following is NOT a barrier to entry?* *A)* Economies of scale *B)* Brand loyalty *C)* Absolute cost advantages *D)* High customer bargaining power *E)* High customer switching costs

*D)* High customer bargaining power

*When shopping for clothing such as shirts and jeans, Tyrone only buys products from Eastern Clothing Company even if there are several other companies that offer similar products at lower prices. Tyrone's preference for Eastern Clothing Company demonstrates:* *A)* lack of demand. *B)* bargaining power. *C)* risk of entry. *D)* brand loyalty. *E)* lack of economies of scale

*D)* brand loyalty.

*Brand loyalty can be created by:* *A)* minimal advertising. *B)* not using patents to protect products. *C)* cutting the costs for research and development. *D)* emphasizing high product quality. *E)* minimizing after-sales service.

*D)* emphasizing high product quality.

*If economies of scale are an industry's primary entry barrier, a new entrant's major concern is:* *A)* its inability to counter brand loyalty that customers have for established companies in the industry. *B)* the inferior quality of its products. *C)* its inability to match the innovation of the established firm. *D)* its inability to produce in sufficient volume to match the cost advantages of established producers. *E)* its inability to get buyers to switch to its product.

*D)* its inability to produce in sufficient volume to match the cost advantages of established producers.

*Many beverage manufacturers are noticing that sales for packaged water and fruit-based beverages is increasing compared to carbonated drinks because customers are increasingly becoming health conscious. This change in customer preferences can be attributed to which of the following factors of the macroenvironment?* *A)* Economic forces *B)* Demographic forces *C)* Technological forces *D)* Political forces *E)* Social forces

*E)* Social forces

*_____ arise when a customer invests time, energy, and money shifting from the products offered by one established company to the products offered by a new entrant.* *A)* Overhead costs *B)* Incremental costs *C)* Marginal costs *D)* Opportunity costs *E)* Switching costs

*E)* Switching costs

*Which of the following is NOT a determinant of the extent of rivalry among established companies?* *A)* Industry competitive structure *B)* Demand conditions *C)* The cost structure of firms in an industry *D)* Exit barriers *E)* The power of buyers

*E)* The power of buyers

*An industry's buyers have high bargaining power when:* *A)* buyers purchase in large quantities. *B)* switching costs are low. *C)* it is economically feasible for buyers to purchase an input from several companies at once. *D)* buyers can threaten to enter an industry and produce the product themselves. *E)* all of the above.

*E)* all of the above.

*Common exit barriers include:* *A)* investments in specific assets. *B)* emotional attachments to an industry. *C)* high fixed costs associated with leaving the industry. *D)* bankruptcy regulations. *E)* all of the above.

*E)* all of the above.

*Economies of scale can arise from:* *A)* cost reductions gained through mass production. *B)* discounts on bulk purchases of raw material inputs and component parts. *C)* advantage gained by spreading production costs over a large production volume. *D)* cost savings associated with spreading marketing and advertising costs over a large volume of output. *E)* all of the above.

*E)* all of the above.

*As a barrier to new entry, absolute cost advantages can be based on:* *A)* continuous advertising of brand and company names. *B)* high product quality, service-oriented innovations, and good after-sales service. *C)* cost reductions that arise from the mass production of standardized output. *D)* the unique ability of established companies to spread fixed costs over a large volume. *E)* superior production operations and processes due to accumulated experience, patents, or trade secrets.

*E)* superior production operations and processes due to accumulated experience, patents, or trade secrets.

(True or False) In Porter's five forces framework, the stronger the five forces, the more limited the ability of established companies to raise prices and earn greater profits.

True

(True or False) Intense rivalry lowers prices and raises costs.

True

(True or False) Interest rates have an impact on the sale of automobiles, appliances, and capital equipment, and thus represent a macroeconomic force.

True

(True or False) Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement strategies that allow it to become more profitable.

True

(True or False) Rapid growth in industry demand enables companies to expand their revenues and profits without taking market share away from competitors.

True

(True or False) Strategic groups within an industry compete amongst themselves even though their business models may vary greatly.

True

(True or False) The final results of successful value creation is above-average returns.

True

(True or False) The objective of assessing the external environment is to determine the timing and significance of the effects of environmental changes and trends on the strategic management of the firm.

True

(True or False) The political/legal segment of the general environment is the arena in which organizations compete for attention, resources and a voice in the laws and regulations guiding interactions among nations.

True

(True or False) The risk of entry by potential competitors is a function of the height of the barriers to entry.

True

(True or False) When the value of the dollar is low compared to the value of other currencies, products made in the United States are relatively inexpensive and products made overseas are relatively expensive.

True

(True/False) Threats arise when conditions in the external environment endanger the integrity and profitability of a company's business.

True

(True or False) High tech industries are often dependent on complementor industries for their mutual success.

True

(True or False) Cost reductions gained through mass-producing a standardized output are a source of scale economies.

True

(True or False) Deregulation of the mortgage industry is an example of how political and legal forces impact and industry.

True

(True or False) Even when entry barriers are very high, new firms may still enter an industry if they perceive that the benefits outweigh the costs of entry.

True

(True or False) Government deregulation of telephone service lowered the barriers to entry and lowered industry profit margins.

True

(True or False) Growing demand tends to reduce rivalry because all companies can sell more without taking market share away from each other.

True

*Which of the following industry structures consists of a large number of small or medium-sized companies, none of which is in a position to determine industry price?* *A)* Fragmented industry *B)* Consolidated industry *C)* Oligopoly *D)* Monopoly *E)* Sector

*A)* Fragmented industry

*Which of the following components was an extension of Porter's original five forces model?* *A)* Risk of entry by potential competitors *B)* The intensity of rivalry among established companies within an industry *C)* The bargaining power of buyer *D)* The bargaining power of suppliers *E)* The lack of substitutes for an industry's products

*A)* Risk of entry by potential competitors

*Which of the following statements is true about potential competitors in an industry?* *A)* They threaten the profitability of established companies. *B)* They are usually encouraged by established companies. *C)* They find it easier to enter an industry when the entry barriers are high. *D)* They find it easier to enter an industry when established companies have economies of scale. *E)* They usually have an absolute cost advantage over established companies.

*A)* They threaten the profitability of established companies.

*Which of the following is not one of Porter's five forces, as proposed in his original model?* *A)* Threat of complementors *B)* Bargaining power of suppliers *C)* Rivalry among established companies *D)* Threat of new entrants *E)* Threat of market changes

*A)* Threat of complementors

*Switching costs may arise when:* *A)* changing from one computer system to another. *B)* substitute products are available at a lower unit cost. *C)* when there are a large number of interchangeable products. *D)* products are commodity-like in nature. *E)* all of the above.

*A)* changing from one computer system to another.

*A group of firms manufactures writing implements such as pens, pencils, and markers. This group should be referred to as a(n):* A) substitute B) market segment C) service provider D) regulator E) industry

E) industry

(True or False) A group of firms all make tools for baking--pots, pans, etc. This group should be referred to as a market segment.

False

(True or False) Access to cheaper capital is an example of an economy of scale.

False

(True or False) Age structure, geographic distribution, income distribution, interest rates, and process innovations are some of the elements of concern when studying the demographic segment of the general environment.

False

(True or False) Changes in the characteristics of a population, such as age or race, are irrelevant to the analysis of an industry's macroenvironment.

False

(True or False) Demographic, economic, political/legal, sociocultural, technological, global, and physical are the seven elements comprising the industry environment.

False

(True or False) Substitute products are not a threat if a company is the market leader.

False

(True or False) Successful innovation cannot transform the nature of industry competition.

False

(True or False) Suppliers are most powerful when the products that they sell have many substitutes.

False

(True or False) The more commodity-like that an industry product is, the lower the intensity of any price war that may develop.

False

(True or False) When buyers are in a weak bargaining position, companies in the industry must lower their prices to increase profits.

False

(True/False) The bottled water industry created new competitors for Coca-Cola, but it did not change the basic industry boundaries.

False

(True/False) To determine its opportunities and threats, a firm should focus on internal processes and capabilities.

False

(True or False) Strong brand loyalty and high customer switching costs are low barriers to entering an industry.

False **they are high barriers to entry

(True or False) Starbucks and an independent local café are different in terms of their business techniques. They both sell coffee, and therefore belong to the same strategic group.

False **they belong to the same industry

(True or False) High exit barriers are most serious as a competitive threat when industry demand is declining.

True

(True or False) A company's closest competitors are those in its strategic group.

True

(True or False) A technological change, such as the rise of the Internet, can represent either an opportunity or a threat.

True

(True or False) Because the health of a nation's economy affects the performance of individual firms and industries, companies study the economic environment to identify changes, trends, and their strategic implications.

True

(True or False) Companies facing greater exit barriers find it harder to reduce capacity, and face a greater threat of severe price competition.

True

(True or False) Companies operating in high-technology industries are dependent on complementary products for their mutual success.

True