TESTBANK: CHAPTER 3
Industry Analysis: The Fundamentals
True/False Questions
1. According to Warren Buffett brilliant managers can succeed, even in businesses with poor
fundamental economics.
[See p.63]
2. According to Charlie Munger, the profitability in the reinsurance industry is depressed by the fact
3. Formal, broad-based scanning of the external environment is an essential activity for all business
enterprises.
[See pp.64-65]
4. If a firm is to create profit, the first condition is that it must supply a product for which the price the
customer is willing to pay exceeds the cost incurred in supplying that product.
[See p.65
5. “Producer surplus” is not a form of “economic rent.”
[See p.66]
6. The greater the value of a product to its customers, the more profitable will it be to supply that
product.
[See p.66]
7. The main reason that niche markets are often highly profitable for incumbents is because their
customers tend to be insensitive to prices.
[See p.66]
8. Michael Porter’s five forces of competition framework links the structure of an industry to its overall
level of profitability.
[See p.68]
9. A product that has close substitutes will tend to have inelastic demand.
[See p.68]
10. In a “contestable market” it is actual entry rather than the threat of entry that keeps prices at their
competitive level.
[See p.70]
11. Economies of scale, absolute cost advantages, high capital requirements, and limited access to
channels of distribution give incumbent firms an advantage over new entrants to an industry.
[See pp.70-71]
12. Threats of retaliation by incumbents against a new entrant (e.g. threatening to make aggressive
price-cuts), cannot be regarded as a source of entry barriers.
[See p.72]
13. Entry barriers that are effective against small, start-up companies tend to be equally effective
against established firms diversifying from other industries.
[See p.72]
14. Concentration in an industry is measured by its concentration ratio—a common measure of which
is the combined market share of the leading firms.
[See p.72]
15. The more similar are the firms in an industry in terms of costs, strategies, and locations, the more
intensely will they compete.
[See p.73]
16. Lower levels of capacity utilization impose higher costs on firms (as fixed costs are spread over a
smaller volume of business). This encourages firms to raise prices.
[See pp.74-75]
17. An exit barrier is anything that is an impediment to excess capacity leaving an industry.
[See p.73]
18. The reason that the shares of steel, automobile and chemical companies are regarded as “cyclical”
is that the high fixed costs of these industries make profits highly sensitive to changes in the level of
demand.
[See pp.73-74]
19. The bargaining power of a buyer when negotiating with a supplier is all about relationship
management; it does not depend upon the threat of walking away from the deal.
[See p. 75]
20. Suppliers of technically-sophisticated components are more likely to be able to exercise supplier
power than the suppliers of raw materials.
[See p.76]
21. The mergers and acquisitions that have increased seller concentration in the US and European
airline industries and in the world metals mining industry were motivated by the desire to save costs,
not to reduce competition in order to raise prices.
[See p.78]
22. If the Android operating system becomes the dominant platform for cell phones, its effect will be to
boost the profitability of the handset industry because it is available free of charge to the handset
makers.
[See p.78]
23. Official industry classifications such as the Standard Industrial Classification mean that there is no
ambiguity over delineating industry boundaries.
[See p.80]
24. Although washing machines and refrigerators are not close substitutes as far as consumers are
concerned, we can consider them to be part of the same industry because of supply-side substitutability.
[See p.81]
25. In identifying key success factors in an industry, it is sufficient to concentrate upon the factors
which determine how customers choose between alternative suppliers.
[See p.82]
26. In commodity businesses such as growing wheat, mining for gold, or fabricating DRAM
semiconductors, the principal key success factors are concerned with the sources of cost efficiency.
[See p.82]
Multiple Choice Questions
27. Given the range of external influences that impact a firm, understanding the external environment
requires managers to:
[See pp.64-65]
28. The core of a firm’s business environment is comprised by:
[See pp.65-66]
29. Economic value is created when:
[See pp.65-66]
30. The profits earned by firms in an industry, are determined by:
[See p. 66]
31. The basic premise of industry analysis is that:
[See p.66]
32. If an industry earns a return on capital in excess of its cost of capital:
[See p.66]
33. Firms supplying niche markets are often highly profitable because:
[See pp.66-67]
34. Economies of scale are a barrier to entry because:
[See pp.70-71]
35. The American Medical Association encourages limits on the number of medical school places for
training new doctors:
[See p.70]
36. Parallel pricing—the tendency for companies in an industry to move prices more or less
simultaneously—is typically an indicator of:
[See p.72]
37. As the competitors in an industry become more diverse in terms of their goals, cost structures, and
strategies, it is likely that:
[See p.73]
38. Industries where a decline in demand is most likely to cause industry-wide losses tend to have the
following characteristics:
[See p.73]
39. Which of the following does not contribute to buyers’ bargaining power?
[See pp.74-75]
40. Bargaining power rests, ultimately, on:
[See p.75]
41. The suppliers of agricultural products tend to lack bargaining power relative to buyers because:
[See p.76]
42. The most useful approach to forecasting industry profitability in the future is:
[See p.77]
43. An industry’s current profitability:
[See p.77]
44. Airlines’ frequent flyer programs and retailer loyalty schemes are both examples of efforts to:
[See pp.78-79]
45. Initiatives to improve an industry’s profitability through changing its structure are:
[See p.79]
46. A market’s boundaries are defined by:
[See p.81]
47. In practice, drawing the boundaries of industries and markets is:
[See p.82]
48. For most business enterprises a market is:
[See pp.81-82]
49. Key success factors are:
[See p.82]
50. Identifying key success factors within an industry requires answers to the following questions:
[See p.82]
51. Legal requirements that banks, providers of wireless telecommunication services, and taxis must
obtain a government issued license before going into business impact the profitability of their
respective industries:
[See p.71]