Chapter 2 – Strategy analysis

Question 2.1 Industry profitability is a function of:

A. The previous price that customers have paid for a product or service.
B. The lowest price that customers will pay for a product or service.
C. The highest price that customers will pay for a product or service.
D. The average price that customers pay for a product or service.

Question 2.2 Which of the following is not a potential source of competition in an industry?

A. The threat of substitute products or services.

B. The threat of entry of new firms.
C. The threat of exit between existing firms.
D. Rivalry between existing firms.

Question 2.3 In what circumstance would a firm expect to earn monopoly profits?

A. When the firm undercuts its competitors in prices.

B. When there is a state of perfect competition.
C. When prices are equal to marginal costs.
D. None of these choices.

Question 2.4 Which of the following industry factors does not affect the nature of rivalry
among existing firms?

A. Concentration of competitors.
B. Legal barriers.
C. Industry growth rate.
D. Ratio of fixed to variable costs.
Question 2.5 Which of the following would not affect the threat of new firms entering an
industry?

A. Legal barriers.
B. First-mover advantage.
C. Economies of scale.
D. Concentration of competitors.

Question 2.6 A patent would be an example of a:

A. Legal barrier.
B. First-mover advantage.
C. Economies of scale.
D. None of these choices.

Question 2.7 Two reasons why substitute products may be a threat are:

A. They have the same form as existing products and are more expensive than a similar
product.
B. They perform the same function as existing products and do this for a similar price.
C. They perform a different function from existing products and do this for a lower
price.
D. None of these choices.

Question 2.8 Which of the following industry factors does not affect the bargaining power of
buyers?

A. How many alternative products a buyer can choose from.

B. Concentration of buyers relative to the concentration of sellers.
C. Price sensitivity of customers.
D. Economies of scale.
Question 2.9 A buyer would be more sensitive to price when:

A. None of these choices.

B. They consume more of a product.
C. There are many switching costs.
D. There are few switching costs.

Question 2.10 A supplier can expect to have more bargaining power when:

A. The product or service is critical to the business of the buyer.

B. There are only a few suppliers in the industry.
C. There are few substitute products available to buyers.
D. All of these choices.

Question 2.11 A potential limitation when evaluating industries is that:

A. Most industries are very competitive

B. Industries may not always have clear boundaries.
C. Some industries have few competitors.
D. An industry may be comprised of firms that are listed and unlisted.

Question 2.12 Which of the following factors might an analyst not consider when identifying
potential competitors?

A. Being similar in size to the firm being analysed.

B. Operating in the same country.
C. Operating in the same industry.
D. Having a different range of activities.

Question 2.13 Cost leadership is one way a firm can build a competitive advantage. Another
option is:

A. Differentiation.
B. Industry leadership.
C. Economies of scale.
D. None of these choices.
Question 2.14 Which of the following best describes how a firm earns above-average
profitability if it attains cost leadership?

A. Producing more goods and services.

B. Designing new products.
C. Increasing its level of advertising.
D. Charging the same price as its competitors.

Question 2.15 If a firm is considering a differentiation strategy, which of the following

should it be focusing on?

A. Costs.
B. How to meet the needs of consumers in a unique manner.
C. Determining what consumers value in a product or service.
D. All of these choices.

Question 2.16 The set of activities a firm performs where it converts inputs into outputs is
an example of:

A. A value chain.
B. Core competencies.
C. A supply chain.
D. A production line.

Question 2.17 If a firm loses its competitive advantage due to a change in the environment,
which of the following is least likely to have occurred?

A. New technologies have emerged.

B. Consumer requirements have changed.
C. They have purchased patents.
D. There has been a change in regulation.
Question 2.18 Corporate social responsibility can produce value for a business because:

A. It can attract and retain higher quality employees.

B. It potentially reduces future litigation costs.
C. It can drive innovation and creativity.
D. All of these choices.

Question 2.19 When analysing a firm that is a multi-business organisation, when should an
analyst consider the economic consequences of managing different business units within
the one firm?

A. When the firm is listed on the stock exchange.

B. Always.
C. When there is substantial competition on at least one of the business units.
D. Only if there are more than three business segments.

Question 2.20 Which of the following best describes the implications of transaction cost
economics?

A. The multi-product firm is an efficient choice of organisation form when coordination

among independent, focused firms is costly because of market transaction costs.
B. The multi-product firm is an inefficient choice of organisation form when
coordination among independent, focused firms is costly because of market
transaction costs.
C. The multi-product firm is an efficient choice of organisation form when coordination
among independent, focused firms is costly because of product transaction costs.
D. None of these choices.

Question 2.21 Which of the following would not give rise to transaction costs?

A. Market imperfections such as incentive problems.

B. Producing products that do not require significant human capital skills.
C. Producing products that require proprietary technology.
D. Market imperfections such as information problems.
Question 2.22 Multi-business companies can experience a diversification discount as:

A. They suffer from incentive misalignment problems.

B. The decision to diversify is due to a desire to maximise the size of the company
instead of increasing shareholder value.
C. It is difficult to value and monitor and value multi-business companies.
D. All of these choices.

Question 2.23 Defining an industry in a way that is inappropriate can lead to:

A. Incomplete evaluation.
B. Both incomplete evaluation and inaccurate forecasts.
C. Inaccurate forecasts.
D. More accurate forecasts.

Question 2.24 A company that experiments with different product designs with the sole
intention of lower manufacturing costs is likely engaging in which strategy?

A. Cost leadership.
B. Product differentiation.
C. Both cost leadership and differentiation.
D. Cost differentiation.

Question 2.25 Firms that straddle both cost leadership and differentiation strategies are
likely to:

A. Not be competitive.
B. Not be very profitable.
C. Have lower priced products.
D. Have a wide variety of products.