Question 1

How do low interest rates affect a business?

Accepted Answer

During periods of low interest rates, firms can easily borrow money to finance future growth. Borrowing at lower rates reduces the cost of capital and enhances a firm's competitiveness.

Question 2

In the five forces model developed by Michael Porter, ________ is not defined narrowly as a firm's closest competitors but rather more broadly to include other factors in an industry like buyers, suppliers, potential new entry of other firms, and the threat of substitutes.

Accepted Answer

In Porter's five forces model, competition is not defined narrowly as a firm's closest competitors but rather more broadly to include other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes.

Question 3

During an interview for a CEO position, Elena's potential employers ask her, "If you get this job, will you focus more on industry effects or firm effects?" What should her answer be?

Accepted Answer

While all these effects can change a firm's performance, firm effects have the biggest impact-up to 55%. Because firm effects come from the actions managers take, Elena would be able to have the most impact on those.

Question 4

How is a firm's task environment different from its general environment?

Accepted Answer

Managers have some influence over external factors in the task environment; they have little direct effect over external forces in the general environment.

Question 5

Kimba Inc. is a manufacturer of smart watches that track the wearer's heart rate and sleep patterns. Which of the following is most likely an implication of new firms entering this industry?

Accepted Answer

The threat of entry by additional competitors may force incumbent firms to spend more to satisfy their existing customers. Larger investments in value creation further reduce an industry's profit potential if prices cannot be raised.

Question 6

Which of the following is a primary feature of the five forces model?

Accepted Answer

In Porter's five forces model, competition is not defined narrowly as the firm's closest competitors, but rather more broadly to include other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes.

Question 7

Etsuro is a management consultant. Baker Corp. asks him to evaluate their company, and he finds that the difference between the cost of producing the firm's products and the value of those products is extremely narrow. What should Etsuro suggest that Baker Corp. management do?

Accepted Answer

Firms create economic value by expanding as much as possible the gap between the value the firm's product or service generates and the cost to produce it.

Question 8

In which of the following situations is the power of suppliers high in an industry?

Accepted Answer

The power of suppliers is high when suppliers' industry is more concentrated than the industry it sells to.

Question 9

Which of the following is a macroeconomic factor that can affect a firm's strategy?

Accepted Answer

Levels of employment are a macroeconomic factor that can affect a firm's strategy. In boom times, unemployment tends to be low, and skilled human capital becomes scarce and more expensive. In economic downturns unemployment rises. As more people search for employment, skilled human capital is more abundant and wages usually fall.

Question 10

The internet service provider industry in the country of Megalopolis is an industry characterized by the presence of strong network effects, high brand loyalty, high economies of scale, and proprietary technology among incumbent firms. Thus, in the internet service provider industry, the

Accepted Answer

In this scenario, the threat of new entrants is most likely low. The threat of entry describes the risk that potential competitors will enter the industry. Entry barriers, which are advantageous for incumbent firms, are obstacles that determine how easily a firm can enter an industry. Network effects, economies of scale, and advantages independent of size such as brand loyalty and proprietary technology are entry barriers.

Question 11

Keeping in mind the five forces in the airline industry, which of the following best explains the difficulty airlines have in generating a profit?

Accepted Answer

The competitive forces are quite unfavorable for generating a profit potential in the domestic airline industry. Substitutes are readily available: If customers believe prices are too high, they can drive their cars or use the train or bus.

Question 12

Economies of scale are cost advantages that accrue for firms with

Accepted Answer

Economies of scale are cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers.

Question 13

A new company named Far Reach Inc. entered the radio retail business, which is a fairly consolidated industry. In response, two large incumbent radio retailers, Smooth Waves and Clear Signal, lowered the price of their radios. Also, they spent more money to improve their radios and on additional marketing. By doing this, Smooth Waves and Clear Signal

Accepted Answer

Potential new entries in an industry decrease profit potential in two major ways. Incumbent firms may lower prices to make entry appear less attractive to the potential new competitors. Incumbent firms also may spend more to satisfy their existing customers.

Question 14

Given the structure of the automobile industry, entering the auto manufacturing industry seemed risky. Yet Tesla Motors joined the fray. Rather than attempting to compete head-on with internal combustion engines, Tesla Motors entered the all-electric car segment, a much less crowded niche in the overall car industry. Which of the following is Tesla most hoping to benefit from in this market niche?

Accepted Answer

Tesla is hoping to benefit from economies of scale in this market niche. Economies of scale are cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers.

Question 15

Clear Calls Inc., a telephone service provider, has a large user base mainly because phone calls and messages between all Clear Calls users are free. When a person switches to a Clear Calls network, his or her entire network of family and friends is likely to switch to the same network to receive the benefit of free calls and messages. In addition, an existing user who gets a new user to register with Clear Calls Inc. is given a free wireless connection. This has helped to keep competition away from Clear Calls. In this scenario, which of the following factors is acting as an entry barrier for Clear Calls Inc.?

Accepted Answer

In this scenario, network effects are acting as an entry barrier for Clear Calls Inc. Network effects describe the positive effect (externality) that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users.

Question 16

Quick Market Inc. is a food supply company that wants to sell its products directly to consumers through mail order instead of going through supermarkets and other stores. However, supermarket chains want to make this transaction either illegal or more difficult for Quick Market. To accomplish this, they are using ________ to influence the political process.

Accepted Answer

Many large companies use powerful lobbying forces to influence the political process.

Question 17

A firm's ________ relates to its ability to create value for customers (V) while containing the cost to do so (C).

Accepted Answer

A firm's strategic position relates to its ability to create value for customers (V) while containing the cost to do so (C). Competitive advantage flows to the firm that is able to create as large a gap as possible between the value the firm's product or service generates and the cost required to produce it (V minus C).

Question 18

The primary objective of Porter's five forces model is to

Accepted Answer

Michael Porter developed the highly influential five forces model to help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage.

Question 19

Which of the following is the best characterization of sociocultural forces?

Accepted Answer

Sociocultural factors capture a society's cultures, norms, and values. Because sociocultural forces are not only constantly in flux but also differ across groups, managers need to closely monitor such trends and consider the implications for firm strategy.

Question 20

A firm's strategic position is likely to be strong when

Accepted Answer

A firm's strategic position relates to its ability to create value for customers (V) while containing the cost to do so (C). Competitive advantage flows to the firm that is able to create as large a gap as possible between the value the firm's product or service generates and the cost required to produce it.

Quiz 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups