TESTBANK: CHAPTER 04
Further Topics in Industry and Competitive Analysis
True/False Questions
1. Porter’s five forces model offers a rigorous, empirically validated approach to explaining the
variation in profitability across industries
[See pp.90-91]
2. Industries are the central arenas in which competition takes place. Disaggregating industries into
segments and groups of firms add little to our understanding of competition.
[See p.90]
3. Industry membership is the single most important source of profitability differences between firms.
[See p.91]
4. The profitability of making inkjet cartridges depends critically upon their complementary
relationship with between inkjet printers.
[See p.92]
5. The value of a product to its consumers tends to be reduced by availability of close substitutes.
Similarly, the value if a product to its consumers is reduced by the availability of complements.
[See p.92]
6. While the profitability of supplying a product tends to be reduced by availability of close substitutes,
the effect of complements on profitability is less clear: it depends upon how value is shared among the
suppliers of the different complements.
[See p.92]
7. When products A and B are complements, the division of profit between the supplier of A and the
supplier of B will depend upon which builds the stronger market position and is better able to reduce
the value contributed by the other.
[See p.92]
8. In supplying video game systems, the suppliers of consoles are no longer in such a strong position to
appropriate the major profits because of increasingly intense competition among the three of them
(Sony, Microsoft and Nintendo), and the growing size and power of the suppliers of video games.
[See pp.92-93]
9. The Schumpeterian view of competition emphasizes the role of innovation and entrepreneurship
[See p.93]
10. In common with the Porter five forces framework, the Schumpeterian approach views competitive
behavior as the outcome of industry structure.
[See p.93]
11. In hypercompetitive markets, the quest for sustainable competitive advantage is the
overwhelmingly important priority for firm strategy.
[See p.95]
12. Empirical studies on hypercompetition show unanimously that industries are becoming increasingly
turbulent and competitive advantage increasingly short-lived
[See p.95]
13. Game theory seeks to predict the outcome of competitive situations by modeling the interactive
decisions by firms,
[See p.95]
14. In the world of business, competition and cooperation seldom coexist.
[See p.96]
15. The propensity for similar businesses to cluster in the same locality (e.g. IT companies in Silicon
Valley, insurance companies in London) is evidence of the intensity of the competitive instincts that
drive business owners.
[See p.96]
16. “Deterrence” can be defined as imposing costs on the other players for actions that we deem to be
desirable
[See p.93]
17. The tendency for both Coca-Cola and Pepsi to compete through large advertising budgets which
have little impact on their relative market shares cannot be a true example of a “prisoners’ dilemma”
because both firms remain highly profitable.
[See p.97]
18. The “prisoners’ dilemma” can be resolved by changing the payoffs in a way that induces
cooperative behavior.
[See p.97]
19. A “prisoners’ dilemma” situation in which a failure to cooperate leaves both parties worse off is as
likely in a multi-period game as in a single-period game.
[See p.97]
20. Deterrence is a competitive action that is more attractive to firms that compete in multiple markets
than in a single market because the resulting reputation can be transferred from one market to another.
[See pp.96-97]
21. After arriving in Mexico in 1519, the destruction by Hernan Cortes of his own ships was a signal,
in game theory terminology, of “commitment” for his troops to the conquest of the Aztec empire
[See p.98]
22. When applied to real business situations, the usefulness of game theory is enhanced by its ability to
predict very different outcomes on the basis of small changes in initial conditions.
[See p.99]
23. Competitive intelligence involves the systematic collection and analysis of public information
about suppliers and customers to aid decision making.
[See p.97
24. The aim of competitive intelligence is to predict competitor behavior on the basis of verifiable
facts. Attempts to “get inside the heads of your rivals” are inherently unreliable and should be avoided.
[See p.101]
25. A company whose primary goal is profitability is likely to be a much more aggressive competitor
than one whose primary goal is market share.
[See p.102]
26. The ability to predict a competitor’s behavior is facilitated by the tendency for the managers within
an industry to share common beliefs about their industry and about the key success factors within it.
[See p.102]
27. To divide an industry into segments it is always preferable to focus on the characteristics of
different customers rather than the characteristics of different products.
[See pp.103–104]
28. The more variables that are deployed to segment a market, the more useful is the resulting
segmentation likely ot be.
[See p.104]
29. To analyze the profit potential of different industry segments, we can use the same Porter five
forces of competition framework that we use to analyze the profit potential of different industries.
[See p.105]
30. In the automobile industry barriers to firms’ mobility between different segments tend to be low,
hence profitability differences between segments are not sustained over long periods of time.
[See pp.105-106]
31. The more similar are key success factors across the different segments of an industry, the more
likely it is that the firms within that industry will specialize by segment.
[See p.105]
32. Industry segmentation is always horizontal—it is based upon the products an industry suppliers and
the customers to which they are supplied. The notion of vertical segmentation—segmenting an industry
along its value chain is attractive in principle but impossible in practice.
[See p.107]
33. A strategic group is a group of firms in an industry that serving the same market segment.
[See p.108]
34. The main usefulness of strategic group analysis is in analyzing interfirm profitability
differences within an industry; it is less useful as a tool for describing the strategic positioning of firms
within an industry.
[See p.108]
Multiple Choice Questions
35. A key limitation of Porter’s five forces model of competition is that:
[See p.93]
36. Empirical research shows that proportion of inter-firm differences in profitability that industry
factors explain is:
[See p.90]
37. The difference between substitute and complementary products may be summarized as follows:
[See p.92]
38. Video game consoles and video games are complementary products: the availability of one
increases the value of the other. In the past the suppliers of consoles were able to appropriate most of
the profits generated by video game systems because:
[See p.92]
39. The producer of a complementary product can maximize its relative bargaining power by means of:
[See p.93]
40. Joseph Schumpeter perceived competition among companies as:
[See p.93]
41. Schumpeter’s process of “creative destruction” challenges Porter’s five forces of competition
framework by:
[See p.91]
42. While the Porter five forces framework is built upon the structure-conduct-performance model of
industrial economics, Schumpeter’s view of competition as creative destruction builds upon:
[See pp.93 and 95]
43. The key implication of “hypercompetition” in business is that:
[See p.95]
44. The prediction that hypercompetition makes competitive advantage temporary:
[See p.95]
45. The principal value of game theory to the field of strategic management is in:
[See pp.95-96]
46. In a market where Firm A and Firm B are leading suppliers, if Firm A initiates a price cut, the
likelihood that Firm B responds with an identical price cut will be greater:
[See pp.96-99]
47. From a game theory perspective, President George W. Bush’s inauguration of a “war on terror”:
[See p.98]
48. The key insight from the “prisoners’ dilemma” game is:
[See p.97]
49. If administering deterrence is costly or unpleasant for the threatening party, then:
[See pp.96 and 98]
50. The relationship between commitment and strategic options may be beast described as:
[See p.98]
51. Signaling refers to:
[See p.99]
52. The relationship between competition and cooperation can be described as follows:
[See p.96]
53. Competitive intelligence, the systematic collection and analysis of information about rival firms, is:
[See p.100-101]
54. Competitive intelligence aims to:
[See p.100]
55. The distinction between legitimate competitive intelligence and industrial espionage:
[See p.101]
56. To attempt to predict competitive behaviors, Porter suggests a four-step framework, where analysts
must identify:
[See pp’101–102]
57. Segmentation is a process through which:
[See pp.102-103]
58. The main use of industry segmentation analysis is:
[See p.103]
59. Barriers to mobility are:
[See p.105]
60. A firm will choose to compete across multiple segments rather than specialize in a single segment
if:
[See p.105]
61. The difference between barriers to entry and barriers to mobility is:
[See p.105
62. “Profit pool mapping” describes a technique for:
[See p.104
63. Strategic groups consist of:
[See p.108]
64. Strategic group analysis is primarily useful for:
[See p.108]
65. In European airline industry, EasyJet, Baltic Air, WizzAir, and Ryanair:
[See p.108]