ESSENTIALS OF STRATEGIC MANAGEMENT, 3RD EDITION
CHAPTER 3
External Analysis: The Identification of
Opportunities and Threats
Name: __________________________ Date: _____________
1. T F The starting point of strategy formulation is an analysis of the forces that shape competition
in the industry in which a company is based.
2. T F Opportunities arise when a company can take advantage of conditions in its environment to
formulate and implement strategies that allow it to be more profitable.
3. T F A company’s closest competitors, its rivals are those that serve the same basic customer needs.
4. T F Once the boundaries of an industry have been identified, the task facing managers is to
analyze competitive forces in the industry environment to identify opportunities and threats.
5. T F Michael Porter argues that the stronger each of the five forces, the more limited the ability of
established companies to raise prices and earn greater profits.
6. T F Potential competitors are companies that are currently competing in an industry, but have the
capability to do so if they choose.
7. T F The risk of entry by potential competitors is a function of the height of barriers to entry.
22 Chapter 3: External Analysis: The Identification of Opportunities and Threats
8. T F Economies of scale arise when unit costs increase as a firm expands it output.
9. T F Brand loyalty exists when consumers have a preference for the products of established
companies.
10. T F Absolute cost advantage is enjoyed by incumbents in an industry and that new entrants
cannot expect to match.
11. T F Switching costs are those costs that consumers must bear to switch from the products offered
by one established company to the products offered by another established company.
12. T F Historically, government regulation has constituted a minor entry barrier into many
industries.
13. T F Rivalry refers to the competitive struggle between companies in an industry to gain market
share from each other.
14. T F A fragmented industry consists of a small number of large companies, none of which is in a
position to determine industry prices.
15. T F A consolidated industry is dominated by a large number of small or medium sized companies
which are in a position to determine industry prices.
16. T F Many fragmented industries are characterized by low entry barriers and commodity-type
products that are hard to differentiate.
17. T F Fixed costs refer to the costs that must be born before a firm makes a single sale.
Chapter 3: External Analysis: The Identification of Opportunities and Threats 23
18. T F Exit barriers are the economic, strategic, and emotional factors that prevent companies from
leaving an industry.
19. T F The bargaining power of buyers is the ability to bargain down prices charged by companies in
the industry or to raise the costs of companies in the industry by demanding better product quality
and service.
20. T F The bargaining power of suppliers is the ability to raise the price of inputs or to raise the costs
of the industry in other ways.
21. T F Substitute products are the products of different businesses or industries that can satisfy
similar customer needs.
22. T F The systematic analysis of forces in the industry environment using the Porter framework is a
powerful tool that helps managers to think strategically.
23. T F Strategic groups are groups of companies in which each company follows a strategy that is
similar to that pursued by other companies in the group, and is the same strategy followed by
companies in other groups.
24. T F Within an industry, each strategic group may face a different set of opportunities and threats.
25. T F Mobility barriers are factors that help the movement of companies between strategic groups.
26. T F An important determinant of the strength of the competitive forces in an industry is the
changes that take place in it over time.
24 Chapter 3: External Analysis: The Identification of Opportunities and Threats
27. T F As an industry enters the shakeout stage of the industry life cycle, the rivalry between
companies decreases.
28. T F One of the defining characteristics of the mature stage of the industry life cycle is that growth
is low or zero.
29. T F The industry life cycle model identifies four sequential stages in the evolution of an industry
that lead to four distinct kinds of industry environment.
30. T F Managers must anticipate how the strength of industry competitive forces will change as the
industry evolves and then formulate appropriate strategies to take advantage of opportunities.
31. T F Rivalry in embryonic industries is based not so much on price as on educating customers,
opening up distribution channels, and perfecting the design of the product.
32. T F The stability of a mature industry is threatened by price wars.
33. T F In a declining industry, competition usually decreases.
34. T F The growth industry is where demand is expanding as second-time consumers enter the
market.
35. T F Normally, the importance of control over technological knowledge as a barrier to entry has
diminished by the time an industry enters its growth stage.
Chapter 3: External Analysis: The Identification of Opportunities and Threats 25
36. T F Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows,
and the industry enters the mature stage.
37. T F As an industry enters maturity, barriers to entry decrease, and the threat of entry from
potential competitors increases.
38. T F Growth in an embryonic industry is slow because of buyers’ unfamiliarity with the industry’s
product, high prices due to the inability of companies to reap any significant scale of economies, and
poorly developed distribution channels.
39. T F As an industry enters the shakeout stage, rivalry between companies becomes intense.
40. T F In mature industries, companies tend to recognize their interdependence and try to avoid
price wars.
41. A group of companies offering products or services that are close substitutes for each other is
referred to as a(n)
a) strategic group.
b) market segment.
c) sector.
d) supplier.
e) industry.
42. A company’s closest competitors are those that
a) are in the same geographical area.
b) serve the same basic customer needs.
c) are small and aggressive.
d) focus on low price.
e) attack and then retreat before the company can respond.
26 Chapter 3: External Analysis: The Identification of Opportunities and Threats
43. Within Porter’s framework, a _________ competitive force can be regarded as a(n) __________.
a) strong; threat
b) weak; threat
c) strong; opportunity
d) weak; competitive advantage
e) strong; competitive advantage
44. It is possible for a company to alter the strength of one or more of the five competitive forces in the
industry
a) by deferring action indefinitely.
b) by adopting a strong and compelling vision.
c) through proper CEO succession planning.
d) through its choice of strategy.
e) None of these
45. Which of the following is not one of Porter’s five forces?
a) Risk of entry by potential competitors
b) Bargaining power of suppliers
c) Ability to earn greater profits
d) Bargaining power of buyers
e) The closeness of substitutes to an industry’s products.
46. 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
47. If economies of scale are an industry’s primary entry barrier, a new entrant’s major risk is
a) its inability to access labor and materials.
b) 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.
Chapter 3: External Analysis: The Identification of Opportunities and Threats 27
48. 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) control over low-cost inputs required for production, be they labor, materials, equipment, or
management skills.
49. Which of the following industry structures consists of a large number of small and 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
50. Which of the following industry structures is dominated by a small number of large companies?
a) Fragmented industry
b) Consolidated industry
c) Mature industry
d) Monopoly
e) Growing industry
51. Which of the following is not a determinant of the extent of rivalry among established companies?
a) The number and size distribution of companies in the industry
b) The power of buyers
c) The cost structure of firms in an industry
d) Exit barriers
e) Demand conditions
52. 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 industry is dominated by a small number of large companies.
28 Chapter 3: External Analysis: The Identification of Opportunities and Threats
53. Research suggests that it is often the __________ firms in an industry that initiate price cuts or
increase promotions in an attempt to cover fixed costs.
a) strongest
b) weakest
c) largest
d) oldest
e) newest
54. 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.
55. The bargaining power of an industry’s buyers is greater when
a) the industry is consolidated and the buyers are many.
b) the buyers make small and infrequent purchases.
c) they can threaten to enter the industry and produce the product themselves.
d) buyers’ switching costs are high.
e) it is not feasible for buyers to purchase inputs from more than one company in the industry.
56. Members of a strategic group
a) compete directly with members of other strategic groups.
b) are affected by Porter’s five competitive forces to the same degree that members of other strategic
groups are affected.
c) follow a business model that is similar to that pursued by other companies in the group.
d) earn the same rate of return.
e) move easily to other groups as desired.
57. The concept of strategic groups suggests that
a) a company’s major competitors are those in other groups.
b) companies within a strategic group all have the same rate of return.
c) it is easier for a company to move between groups than within a group.
d) different strategic groups can have different standings with respect to each of Porter’s five competitive
forces.
e) each company in the group pursues a unique basic strategy.
Chapter 3: External Analysis: The Identification of Opportunities and Threats 29
58. Mobility barriers
a) prevent movement within a strategic group.
b) inhibit the movement of companies between strategic groups in an industry.
c) inhibit the movement of a company from one industry to another.
d) include exit barriers of the strategic group that a company wants to enter.
e) are low when exit barriers in the strategic group that a company is a member of are high.
59. Merck, Eli Lilly, and Pfizer are examples of?
a) a generic drug strategic group.
b) companies which manufacture low-cost drugs.
c) companies with low R&D spending
d) a proprietary strategic group pursuing a high-risk, high-return strategy.
e) unsuccessful patent monopolies.
60. Walmart, Kmart, Target, Costco and Fred Meyer are examples of
a) companies in a proprietary group.
b) companies with the same rate of return.
c) companies which move between strategic groups.
d) a group of companies characterized as discounters within a strategic group.
e) companies which share competitive forces.
61. In growth industries,
a) replacement demand is increasing rapidly.
b) technological expertise is the most important entry barrier.
c) rivalry is high.
d) distribution channels are poorly developed.
e) buyers are familiar with the industry’s product.
62. Entry barriers in the embryonic stage are frequently based on
a) brand loyalty.
b) technological know-how
c) absolute cost advantages.
d) economies of scope.
e) economies of scale
30 Chapter 3: External Analysis: The Identification of Opportunities and Threats
63. Growth industries
a) typically suffer from high mobility barriers.
b) provide economies of scale to existing companies
c) have high rivalry among established companies.
d) increase prices because customers are more aware of the industry’s product.
e) tend to be characterized by weak rivalry.
64. All of the following are part of the shakeout stage of the industry life cycle except
a) demand is limited to replacement demand.
b) demand approaches saturation levels.
c) rivalry between companies becomes intense.
d) capacity continues to grow.
e) companies cut prices.
65. Demand reaches total saturation in the ___________ stage of the industry life cycle.
a) embryonic
b) growth
c) shakeout
d) maturity
e) decline
66. The threat from new entrants is greatest in the _________ stage of the industry life cycle.
a) embryonic
b) growth
c) shakeout
d) maturity
e) decline
67. High exit barriers pose the greatest threat to companies in the _________ stage of the industry life
cycle.
a) embryonic
b) growth
c) maturity
d) fragmented
e) decline
Chapter 3: External Analysis: The Identification of Opportunities and Threats 31
68. Which of the following is not one of the factors in the economic forces of the macroenvironment?
a) Growth rate of the economy
b) Interest rates
c) Price inflation
d) Currency exchange rates
e) Market saturation
69. All of the following are forces in the wider macroenvironment except
a) economic forces
b) global forces
c) demand forces
d) demographic forces
e) social forces
70. Julian is asked to examine the demographic environment facing his employer, a clothing
manufacturer. Which of the following should Julian examine?
a) Government regulations
b) Inflation
c) Manufacturing technology
d) Aging of the population
e) Society’s growing interest in exercise
71. Beverage makers are finding that water sales are increasing due to consumers’ preferences for
healthy drinks. Which part of the macroenvironment does this represent?
a) Economic forces
b) Social forces
c) Embryonic forces
d) Political forces
e) Demographic forces
72. High levels of immigration into the U.S. in recent years have had an impact on which of the following
macroenvironmental factors?
a) Economic
b) Social
c) Political and legal
d) Demographic
e) All of the macroenvironmental factors have been affected.
32 Chapter 3: External Analysis: The Identification of Opportunities and Threats
73. The Internet is an example of a
a) technological force.
b) social force.
c) political and legal force.
d) demographic force.
e) global force.
74. All of the following are demographic forces in the macroenvironment except
a) age
b) values
c) gender
d) social class
e) sexual orientation
75. Due to a recent relaxation in pollution standards, Ford Motors is withdrawing its electric-powered
cars from sales in the U.S. market. Ford is responding to a change in which of the following
macroenvironmental forces?
a) Economic
b) Demographic
c) Strategic
d) Social
e) Political and legal
76. List and briefly discuss each of the elements of Michael Porter‘s Five Forces Model.
77. What is meant by the term “strategic group,” and why is it important for managers to understand this
in order to position their companies in a competitive marketplace?
78. Using the industry life cycle model, tell how the threats and opportunities for existing firms in an
industry change over time.
79. Describe one major limitation of each of the following models for competitive analysis: the five forces
model, the strategic groups model, and the industry life cycle model. Does the existence of these
limitations mean that the models are not useful? Why or why not?
34 Chapter 3: External Analysis: The Identification of Opportunities and Threats
80. Consider the macroenvironment facing a large, international airline headquartered in the United
States (such as American or United Airlines). Give at least three examples of important trends or
events from each of the five segments of the airline’s macroenvironment (macroeconomic,
technological, demographic, social, and political/legal), and tell whether each of them represents a
threat or an opportunity for the firm.