49. Intro Ind & comp analysis (Web + Sch Note)

Auto manufacturers and home builders would most likely be grouped together in an industry classification system based on: A) sensitivity to business cycles. B) type of business activity. C) dividend yields.

A Auto manufacturing and home building are both cyclical industries. An industry classification system based on business cycle sensitivity would be the most likely to group firms from these industries together.

The competitive forces identified by Michael Porter include: A) rivalry among existing competitors and bargaining power of buyers. B) threat of substitute products and rivalry among suppliers. C) bargaining power of existing competitors and threat of new entrants.

A Porter's five competitive forces are: (1) rivalry among existing competitors; (2) threat of new entrants; (3) threat of substitute products; (4) bargaining power of buyers; (5) bargaining power of suppliers.

A firm's earnings are most likely to be cyclical if: A) the firm produces luxury items. B) most of the firm's costs depend on its level of output. C) the firm operates in a growth industry.

A Producers of luxury items tend to have cyclical earnings because consumers typically decrease their purchases of these items during economic recessions. The earnings of firms with high percentages of variable costs are not as likely to be cyclical as those of firms with high percentages of fixed costs (i.e., high operating leverage). A growth industry has demand that is strong enough that earnings remain relatively unaffected by the business cycle.

Which of the following is least likely an element of an industry strategic analysis? A. Market correlations. B. Demographic influences. C. Influence of industry capacity on pricing.

A Elements of an industry strategic analysis include the major firms, barriers to entry/success, industry concentration, influence of industry capacity on pricing, industry stability, life cycle, competition, demographic influences, government influence, social influence, technological influence, and whether the industry is growth, defensive, or cyclical.

The industry experience curve shows the cost per unit relative to: A. output. B. age of firms. C. industry life-cycle stage.

A The experience curve shows the cost per unit relative to output. Unit cost declines at higher output volume because of increases in productivity and economies of scale, especially in industries with high fixed costs.

For relative valuation, a peer group is best described as companies: A) in a similar sector or industry classification. B) with similar business activities and competitive factors. C) at a similar stage of the industry life cycle.

B An analyst should form peer groups of companies that have similar business activities, drivers of demand and costs, and access to capital. Companies in the same industry or sector and companies at the same stage of the industry life cycle are not necessarily comparable for equity valuation purposes.

Technological changes are most likely to result in which of the following effects? Evolving technology is likely to result in changes in: A) educational curriculum only. B) educational curriculum and the relative demand for various products. C) the relative demand for various products only.

B If technological changes result in changes in the set of skills required of workers, this is likely to lead to changes in educational curriculum (and possibly delivery). Such changes often result in the production and demand for new or different products.

An aggressive price reduction to gain market share is most likely to be associated with a: A) product differentiation strategy. B) cost leadership strategy. C) service differentiation strategy.

B Michael Porter identified two competitive strategies: cost leadership and product or service differentiation. A firm that uses a cost leadership or low-cost strategy seeks to have low production costs that will enable it to offer lower prices than its competitors to protect or gain market share. A product or service differentiation strategy seeks to gain a price premium for its products by making them distinctive to the consumer.

The industry experience curve illustrates the relationship between: A) company age and profitability. B) cumulative output and cost per unit. C) productivity and average years of employment.

B The industry experience curve shows cost per unit relative to cumulative output. Cost per unit typically decreases over time due to higher utilization rates for fixed capital, improvements in the efficiency of labor, and better product design and manufacturing methods.

Which of the following best describes a low-cost competitive strategy? A. Volume sold is typically modest. B. Managerial incentives promote operational efficiency. C. Success depends heavily on creative marketing and product development.

B Firms that use a low-cost strategy should have managerial incentives suitable to create efficient operations. In a low-cost strategy, the firm seeks to generate high enough sales volume to make a superior return. Marketing and product development are key elements of a differentiation strategy.

Firms and industries are most appropriately classified as cyclical or non-cyclical based on: A. their stock price fluctuations relative to the market. B. the sensitivity of their earnings to the business cycle. C. the volatility of their earnings relative to a peer group.

B For industry analysis, cyclical firms and industries are those with earnings that are highly dependent on the business cycle, while non-cyclical firms and industries are those with earnings that are relatively less sensitive to the business cycle.

Greater pricing power is most likely to result from greater: A. unused capacity. B. market concentration. C. volatility in market share.

B Greater concentration (a small number of firms control a large part of the market) typically reduces competition and results in greater pricing power. Greater unused capacity in an industry, especially if chronic, results in greater price competition and less pricing power. Greater stability in market share is typically associated with greater pricing power.

Industry classification systems from commercial index providers typically classify firms by: A. statistical methods. B. products and services. C. business cycle sensitivity.

B The classification systems provided by S&P/MSCI Barra, Russell, and Dow Jones/FTSE classify firms according to the product or service they produce.

Industry overcapacity and increased cost cutting characterize which stage of the industry life cycle? A. Growth. B. Shakeout. C. Maturity.

B The shakeout stage is characterized by slowed growth, intense competition, industry overcapacity, increased cost cutting, declining profitability, and increased failures.

Industry analysis is most likely to provide an analyst with insight about a company's: A) competitive strategy. B) financial performance. C) pricing power.

C Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis.

Pricing power for the firms in an industry is most likely to result from low: A) barriers to entry. B) industry concentration. C) levels of capacity.

C Low capacity is associated with pricing power because it increases the likelihood that supply in the short run will be less than demand at current prices. Low barriers to entry and low industry concentration (a fragmented market) typically suggest firms have little pricing power.

Which of the following industries is most likely to operate in a fragmented market? A) Pharmaceuticals. B) Confections. C) Oil services.

C Most areas of the oil services industry are characterized by many small competitors. The confections and pharmaceutical industries each have a small number of very large firms.

Declining prices that result from the development of substitute products are most likely to characterize an industry in the: A) shakeout stage. B) mature stage. C) decline stage.

C The decline stage of the industry life cycle is often characterized by declining prices as substitute products or global competition emerge, or as a result of decreasing demand due to societal changes

An analyst should most likely include two firms in the same peer group for analysis if the firms: A. are both grouped in the same industry classification. B. are similar in size, industry life-cycle stage, and cyclicality. C. derive their revenue and earnings from similar business activities.

C Firms should be included in a peer group if their business activities are comparable. An analyst may begin with available industry classifications when forming peer groups but should refine them based on factors including the firms' sources of demand and earnings and the geographic markets in which they operate.

Which of the following statements best describes the relationship between pricing power and ease of entry and exit? Greater ease of entry: A. and greater ease of exit decrease pricing power. B. and greater ease of exit increase pricing power. C. decreases pricing power and greater ease of exit increases pricing power.

C In industries with greater ease of entry, firms have little pricing power because new competitors can take away market share. High costs of exiting result in overcapacity and likely price wars. Greater ease of exit (i.e., low costs of exit) increases pricing power.

Which of the following is least likely a significant external influence on industry growth? A. Social influences. B. Macroeconomic factors. C. Supplier bargaining power.

C Supplier bargaining power is best characterized as a force internal to the industry. External influences on industry growth, profitability, and risk include macroeconomic, technological, demographic, governmental, and social influences.