Crafting and Executing Strategy, 22e (Thompson)

Chapter 3 Evaluating a Company's External Environment

1) The strategically relevant factors outside a company's industry boundaries—economic

conditions, political factors, sociocultural forces, technological factors, environmental factors,
and legal/regulatory conditions—are known as
A) the industry and the competitive arena in which the company operates.
B) general economic conditions plus the factors driving change in the markets where a company
operates.
C) a company's macro-environment.
D) the competitive market environment that exists between a company and its competitors.
E) the dominant economic features of a company's industry.

Answer: C
Explanation: Six principal components—political factors, economic conditions in the firm's
general environment (local, country, regional, worldwide), sociocultural forces, technological
factors, environmental factors (concerning the natural environment), and legal/regulatory
conditions—constitute a company's macro-environment.
Difficulty: 1 Easy
Topic: Understanding a Firm's External Environment
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
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2) Managers must chart a company's strategic course by

A) focusing on the local environment in which they are operating.
B) ensuring excess production capacity and/or inventory.
C) competing fiercely for a share in the market.
D) building a bigger dealer network.
E) developing a thorough understanding of the company's external and internal environment.

Answer: E
Explanation: In order to chart a company's strategic course wisely, managers must first develop
a deep understanding of the company's present situation. Two facets of a company's situation are
especially pertinent: (1) its external environment, most notably, the competitive conditions of the
industry in which the company operates, and (2) its internal environment, particularly the
company's resources and organizational capabilities.
Difficulty: 1 Easy
Topic: Understanding a Firm's External Environment
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
Bloom's: Understand
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3) The homebuilding industry is not affected by such macro-influences as
A) changes in mortgage interest rates, rules, and regulations that make it easier/harder for
homebuyers to obtain mortgages.
B) trends in household incomes and buying power.
C) the distinctive competences of incumbent firms.
D) disasters and other unanticipated events in the natural environment.
E) shifting preferences of families for renting versus owning a home, and/or homes of various
sizes, styles, and price ranges.

Answer: C
Explanation: Every company operates in a broad macro-environment that comprises six
principal components: political factors, economic conditions in the firm's general environment
(local, country, regional, worldwide), sociocultural forces, technological factors, environmental
factors (concerning the natural environment), and legal/regulatory conditions. The homebuilding
industry, in this example, is affected by such macro-influences as trends in household incomes
and buying power, rules and regulations that make it easier/harder for homebuyers to obtain
mortgages, changes in mortgage interest rates, shifting preferences of families for renting versus
owning a home, and shifts in buyer preferences for homes of various sizes, styles, and price
ranges. The distinctive competences of incumbent firms is an internal factor, not part of the
macro-environment.
Difficulty: 3 Hard
Topic: Understanding a Firm's External Environment
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
Bloom's: Understand
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4) Which of the following is not one of the principal components of strategic significance in the
PESTEL analysis?
A) political factors including the extent to which government intervenes in the economy
B) economic conditions that include the general economic climate and specific factors such as
interest rates, inflation rate, and unemployment rate, as well as conditions in the stock and bond
markets that can affect consumer confidence
C) sociocultural forces that include societal values, attitudes, cultural factors, and lifestyles that
impact business
D) technological factors that include the pace of change and technical developments that have
the potential for impacting society
E) environmental forces that include the competitive structure, the degree of industry
fragmentation, and the mobility barriers that inhibit business

Answer: E
Explanation: PESTEL analysis is an acronym that serves as a reminder of the six principal
components of the macro-environment: political, economic, sociocultural, technological,
environmental (concerning the natural environment, not the business environment), and
legal/regulatory.
Difficulty: 1 Easy
Topic: Understanding a Firm's External Environment
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
Bloom's: Remember
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5) The biggest strategy-shaping impact on on-demand transportation providers such as Uber and
Lyft is most likely to be
A) Yellow Cab companies launching mobile app campaigns for community-connect and
awareness.
B) Amazon launching a mobile delivery service via drones.
C) Apple launching a global network of driverless cars, buses, and trucks on demand via a
mobile app.
D) Tesla and ZipCar announcing a joint venture for electric automobile sharing services.
E) Greyhound developing and marketing a mobile app for customers to purchase intercity bus
tickets.

Answer: C
Explanation: The factors in a company's environment having the biggest strategy-shaping
impact typically pertain to the company's immediate industry and competitive environment.
Apple launching a global network of driverless transportation vehicles on demand via mobile
app will compete directly with and probably cannibalize most other transportation businesses
that remain reliant on human drivers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
Bloom's: Analytical
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6) A strategically relevant political factor in the macro-environment that will influence the
performance of all firms across the board is most likely to be
A) the strength of the federal banking system.
B) the exogenous forces related to the general environmental demand.
C) social factors that could fuel a political agenda and create greater transparency.
D) bailouts and energy policies that are industry specific.
E) tax policy, fiscal policy, and tariffs providing impetus for antitrust matters.

Answer: A
Explanation: Political factors include political policies, including the extent to which a
government intervenes in the economy. They include such matters as tax policy, fiscal policy,
tariffs, the political climate, and the strength of institutions such as the federal banking system.
Some political policies affect certain types of industries more than others. An example is energy
policy, which affects energy producers and heavy users of energy more than other types of
businesses.
Difficulty: 2 Medium
Topic: Understanding a Firm's External Environment
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
Bloom's: Understand
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7) Avon Products at one point secured information about its biggest rival, Mary Kay Cosmetics,
by having its personnel search through the garbage bins outside MKC's headquarters. This is an
example of
A) how companies in an industry can sustain good track records for revenue growth and
profitability.
B) strategic moves rivals are likely to make next.
C) industry key factors for future competitive success.
D) lawful gathering of competitive intelligence.
E) lawful but probably unethical gathering of competitive intelligence.

Answer: E
Explanation: According to Illustration Capsule 3.2, when MKC officials learned of Avon's
actions and sued, Avon claimed it had done nothing illegal, since a 1988 Supreme Court case had
ruled that trash left on public property (in this case, a sidewalk) was anyone's for the taking.
Avon even produced a videotape of its removal of the trash at the MKC site. Avon won the
lawsuit—but Avon's action, while legal, scarcely qualifies as ethical.
Difficulty: 2 Medium
Topic: Ethical Behavior in Business Strategies
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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8) The impact of the macro-environment on a company's strategic opportunities is not

exemplified by the following situation?
A) Sales of Stolichnaya Vodka in the United States dwindle on account of a boycott of Russian
products.
B) Consumer confidence in Volkswagen drops precipitously because of falsified emissions data.
C) Netflix squares off with Amazon Prime as its most potent rival in the streaming television and
film industry.
D) Traffic increases at the outlets of Whole Foods following its introduction of stores comprised
solely of generic products.
E) Sales of FitBit surge on account of a new feature that monitors users' blood pressure.

Answer: C
Explanation: The six principal components of the macro-environment are political, economic,
sociocultural, technological, environmental (concerning the natural environment), and
legal/regulatory. Rival firms are part of the immediate industry and competitive environment.
Difficulty: 2 Medium
Topic: Understanding a Firm's External Environment
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Apply
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9) The most powerful and widely used conceptual tool for diagnosing the principal competitive
pressures in a market is
A) the five forces framework.
B) PESTEL.
C) the driving forces model.
D) strategic group mapping.
E) SWOT analysis.

Answer: A
Explanation: The character and strength of the competitive forces operating in an industry are
never the same from one industry to another. The most powerful and widely used conceptual tool
for diagnosing the principal competitive pressures in a market is the five forces framework.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
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10) The competitive pressures on companies within an industry come from all of the following
except
A) those associated with the market maneuvering and jockeying for buyer patronage that goes on
among rival firms in the industry.
B) those companies in other industries attempting to win buyers over to their substitute products.
C) those associated with the threat of new entrants into the marketplace.
D) those associated with the bargaining power of suppliers and customers.
E) those associated with environmental factors such as water shortages.

Answer: E
Explanation: The five forces framework holds that competitive pressures on companies within
an industry come from five sources. These include (1) competition from rival sellers, (2)
competition from potential new entrants to the industry, (3) competition from producers of
substitute products, (4) supplier-bargaining power, and (5) customer-bargaining power.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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11) The five forces of competitive pressures do not include
A) the power and influence of social/demographic trends.
B) the bargaining power of suppliers and seller-supplier collaboration.
C) the threat of new entrants into the market.
D) the attempts of companies in other industries to win customers over to their own substitute
products.
E) the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in
the industry.

Answer: A
Explanation: The five forces framework holds that competitive pressures on companies within
an industry come from five sources. These include (1) competition from rival sellers, (2)
competition from potential new entrants to the industry, (3) competition from producers of
substitute products, (4) supplier-bargaining power, and (5) customer-bargaining power.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
AACSB: Knowledge Application
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12) Market maneuvering and jockeying for buyer patronage that goes on among rival sellers in
the industry
A) is less strong than the competitive pressures that stem from the ready availability of
attractively priced substitute products.
B) is the strongest force among the five forces that drive profitability in an industry.
C) emerges from close collaboration with suppliers and the competitive pressures that such
collaboration creates.
D) is less important than competitive pressure associated with the potential entry of new
competitors.
E) has about the same impact as bargaining power and leverage that large customers are able to
exercise.

Answer: B
Explanation: The strongest of the five competitive forces is often the rivalry for buyer
patronage among competing sellers of a product or service.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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13) Using the five forces model of competition to determine the character and strength of the
competitive forces within a given industry involves
A) building the picture of competition in three steps: (1) identify the different parties involved,
along with specific factors that bring about competitive pressures; (2) evaluate how strong the
pressures stemming from each of the five forces are (strong, moderate or weak); and (3)
determine whether the collective impact of the five competitive forces is conducive to earning
attractive profits in the industry.
B) building the picture of competition in two steps: (1) determine which rival has the biggest
competitive advantage and (2) assess whether the competitive advantages possessed by various
industry members allow most industry members to earn above-average profits.
C) evaluating whether competition is being intensified or weakened by the industry's driving
forces and key success factors.
D) assess whether the collective impact of all five forces is weak enough to allow industry
members to go on the offensive or use a defensive strategy to insulate against fierce competitive
pressures.
E) gauging the overall strength of competition based on how many industry rivals are operating
with a competitive advantage and how many are operating at a competitive disadvantage.

Answer: A
Explanation: Using the five forces model to determine the nature and strength of competitive
pressures in a given industry involves three steps: (1) identify the different parties involved,
along with specific factors that bring about competitive pressures; (2) evaluate how strong the
pressures stemming from each of the five forces are (strong, moderate or weak); and (3)
determine whether the collective impact of the five competitive forces is conducive to earning
attractive profits in the industry.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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14) What makes the marketplace a competitive battlefield?
A) the race of industry members to build strong defenses against the industry's driving forces
B) the constant rivalry of firms to strengthen their standing with buyers and win a competitive
edge over rivals
C) the ongoing race among rival sellers to have the highest-quality product
D) the ongoing efforts of industry members to introduce new and improved products/services at
a faster rate than their rivals
E) the ongoing race among rivals to achieve the fastest rate of growth in revenues and profits

Answer: B
Explanation: The strongest of the five competitive forces is often the rivalry for buyer
patronage among competing sellers of a product or service.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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15) Market maneuvering among industry rivals

A) determines whether the industry's strategic group map will be static or dynamic.
B) centers around collaborative efforts to overcome the bargaining power of powerful suppliers
and powerful buyers.
C) is usually an industry's strongest driving force.
D) is usually one of the two or three weakest competitive forces because of the close familiarity
that rivals have for one another's likely next moves.
E) is ongoing and dynamic, with moves and countermoves of rivals producing a continually
evolving competitive landscape that delivers winners and losers.

Answer: E
Explanation: When rivalry is strong, the battle for market share is generally so vigorous that the
profit margins of most industry members are squeezed to bare-bones levels.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
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16) Rivalry among competing sellers decreases
A) when buyer demand is growing rapidly.
B) as it becomes less costly for buyers to switch brands.
C) as the products of rival sellers become commoditized.
D) when there is excess production relative to demand.
E) as the number of competitors increases.

Answer: A
Explanation: Rivalry increases and becomes a stronger force when: buyer demand is growing
slowly; buyer costs to switch brands are low; the products of industry members are commodities
or else weakly differentiated; the firms in the industry have excess production capacity and/or
inventory; the firms in the industry have high fixed costs or high storage costs; competitors are
numerous or are of roughly equal size and competitive strength; rivals have diverse objectives,
strategies, and/or countries of origin; and/or rivals have emotional stakes in the business or face
high exit barriers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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17) External forces in the natural environment include
A) the trend toward healthier lifestyles, which can shift spending toward exercise equipment and
health clubs and away from alcohol and snack foods.
B) air and/or water pollution, the depletion of irreplaceable natural resources, or inefficient
energy/resource usage.
C) interest rates, exchange rates, the inflation rate, the unemployment rate, the rate of economic
growth, trade deficits or surpluses, savings rates, and per-capita domestic product.
D) tax policy, fiscal policy, tariffs, the political climate, and the strength of institutions such as
the federal banking system.
E) slow growth in buyer demand.

Answer: B
Explanation: The relevance of considerations about external forces in the natural environment
stems from the fact that some industries contribute more significantly than others to air and/or
water pollution or to the depletion of irreplaceable natural resources, or to inefficient
energy/resource usage, or are closely associated with other types of environmentally damaging
activities (unsustainable agricultural practices, the creation of waste products that are not
recyclable or biodegradable). Growing numbers of companies worldwide, in response to stricter
environmental regulations and also to mounting public concerns about the environment, are
implementing actions to operate in a more environmentally and ecologically responsible manner.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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18) Legal and regulatory factors in the external environment typically do not include
A) minimum wage legislation in low-wage industries (such as nursing homes and fast food
restaurants) that employ substantial numbers of relatively unskilled workers.
B) consumer protection statutes
C) genetic engineering, nanotechnology, and solar energy technology.
D) antitrust laws.
E) occupational health and safety regulations specific to certain industries, such as meatpacking
and coalmining, where jobs are hazardous or carry high risk of injury

Answer: C
Explanation: All of the above are legal and regulatory factors in the external environment with
the exception of the technology factors (genetic engineering, nanotechnology, and solar energy
technology).
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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19) Rivalry among competing sellers is generally less intense when

A) there are relatively more industry key success factors.
B) the industry's driving forces are weak and rivals have mostly commodity products.
C) barriers to entry are moderately low and the pool of likely entry candidates is large.
D) rivals are wary of making fresh moves to lower prices, introduce new products, increase
promotional efforts and advertising, and otherwise gain sales and market share.
E) buyers have many alternative products or services from which to choose.

Answer: D
Explanation: When rivalry is strong, the battle for market share is generally so vigorous that the
profit margins of most industry members are squeezed to bare-bones levels.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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20) The competitive battles among rival sellers striving for better market positions, higher sales
and market shares, and competitive advantage, suggest the rivalry force
A) is stronger when firms strive to be low-cost producers than when they use differentiation and
focus strategies.
B) is often weak when rivals have emotional stakes in business or face high exit barriers.
C) is largely unaffected by whether industry conditions tempt rivals to use price cuts or other
competitive weapons to boost unit sales.
D) tends to intensify when strong companies with sizable financial resources, proven competitive
capabilities, and respected brand names hurdle entry barriers looking for growth opportunities
and launch aggressive, well-funded moves to transform into strong market contenders.
E) is weaker when more firms have weakly differentiated products, buyer demand is growing
slowly, and buyers have moderate switching costs.

Answer: D
Explanation: An analysis of the factors affecting the threat of entry can help managers
determine whether the threat of entry into their industry is high or low, in general. But certain
kinds of companies—those with sizable financial resources, proven competitive capabilities, and
a respected brand name—may be able to hurdle an industry's entry barriers even when they are
high.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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21) In analyzing the strength of competition among rival firms, an important consideration is
A) the potential for buyers to exercise strong bargaining power.
B) the diversity of competitors in terms of long-term direction, objectives, strategies, and
countries of origin.
C) the number of firms pursuing differentiation strategies versus the number pursuing low-cost
leadership strategies and focus strategies.
D) the extent to which some rivals have more than two competitively valuable competencies or
capabilities.
E) whether the industry is characterized by a strong learning/experience curve and whether the
industry is composed of many or few strategic groups.

Answer: B
Explanation: Since macro-economic factors affect different industries in different ways and to
different degrees, it is important for managers to determine which of these represent the most
strategically relevant factors outside the firm's industry boundaries. By strategically relevant, we
mean important enough to have a bearing on the decisions the company ultimately makes about
its long-term direction, objectives, strategy, and business model.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
Bloom's: Understand
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22) The intensity of rivalry among competing sellers does not depend on whether
A) the industry has more than two strong driving forces and whether the industry has more than
two diverse and capable strategic groups.
B) competitors are diverse in terms of long-term directions, objectives, strategies, and countries
of origin.
C) strong companies outside the industry have acquired weak firms in the industry and are
launching aggressive moves to transform the acquired companies into strong market contenders.
D) one or two rivals have particularly powerful and successful strategies to grow the business,
attract and retain buyers, and develop a sustained competitive advantage.
E) industry conditions attract industry members to use price cuts or other competitive weapons to
boost total sales volume and market share.

Answer: A
Explanation: Just how serious the threat of entry is in a particular market depends on two
classes of factors: the expected reaction of incumbent firms to new entry and what are known as
barriers to entry. The threat of entry is low when incumbent firms are likely to retaliate against
new entrants with sharp price discounting and other moves designed to make entry unprofitable,
and when entry barriers are high.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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23) In which of the following instances is rivalry among competing sellers not more intense?
A) when certain competitors are dissatisfied with their market position and make moves to
bolster their standing
B) when strong companies outside the industry acquire weak firms in the industry and launch
aggressive moves to transform their newly acquired competitors into stronger market contenders
C) when competitors are fairly equal in size and capability
D) when the products of rivals are weakly differentiated, buyer switching costs are low, and
market demand is growing slowly
E) when there are vast numbers of small rivals so the impact of any one company's actions is
spread thinly across all industry members

Answer: E
Explanation: Rivalry increases and becomes a stronger force when: buyer demand is growing
slowly; buyer costs to switch brands are low; the products of industry members are commodities
or else weakly differentiated; the firms in the industry have excess production capacity and/or
inventory; the firms in the industry have high fixed costs or high storage costs; competitors are
numerous or are of roughly equal size and competitive strength; rivals have diverse objectives,
strategies, and/or countries of origin; and/or rivals have emotional stakes in the business or face
high exit barriers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Apply
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24) Competing companies deploy whatever means necessary to strengthen market position,
including all of the following except
A) marketing tactics that include special sales promotions such as introducing new or improved
features or increasing the number of styles to provide greater product selection.
B) differentiating their products by offering better performance features than rivals.
C) improving innovation to increase product performance and quality.
D) making efforts to expand dealer networks.
E) reducing distribution capabilities and market presence.

Answer: E
Explanation: Entry barriers are high under the following conditions: industry incumbents enjoy
large cost advantages over potential entrants; customers have strong brand preferences and high
degrees of loyalty to seller; patents and other forms of intellectual property protection are in
place; there are strong network effects in customer demand; capital requirements are high; there
are difficulties in building a network of distributors/dealers or in securing adequate space on
retailers' shelves; there are restrictive regulatory policies; and/or there are restrictive trade
policies.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
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25) Which of the following is generally not considered a barrier to entry?

A) restrictive regulatory policies
B) high capital requirements
C) strong brand preferences
D) many industry patents in place
E) weak network effects in customer demand

Answer: E
Explanation: Entry barriers are high under the following conditions: industry incumbents enjoy
large cost advantages over potential entrants; customers have strong brand preferences and high
degrees of loyalty to seller; patents and other forms of intellectual property protection are in
place; there are strong network effects in customer demand; capital requirements are high; there
are difficulties in building a network of distributors/dealers or in securing adequate space on
retailers' shelves; there are restrictive regulatory policies; there are restrictive trade policies.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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26) Potential entrants are more likely to be deterred from actually entering an industry when
A) incumbent firms are willing and able to be aggressive in defending their market positions
against entry.
B) incumbent firms are complacent.
C) buyers are not particularly price-sensitive and the industry already contains a dozen or more
rivals.
D) the relative cost positions of incumbent firms are about the same, such that no one incumbent
has a meaningful cost advantage.
E) buyer switching costs are moderately low because of strong product differentiation among
incumbent firms.

Answer: A
Explanation: The threat of new entry increases the competitive pressures in an industry. This is
because incumbent firms typically lower prices and increase defensive actions in an attempt to
deter new entry when the threat of entry is high.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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27) Competitive pressures associated with the threat of entry are greater in all of the following
situations except when
A) incumbent firms are willing to strongly contest the entry of newcomers with moves designed
to make entry unprofitable.
B) a large pool of potential entrants exists, some of which have the capabilities to overcome high
entry barriers.
C) entry barriers are relatively low and buyer demand for the product is growing rapidly, and
newcomers can expect to earn attractive profits without inviting a strong reaction from
incumbents.
D) existing industry members are looking to expand their market reach by entering product
segments or geographic areas where they currently do not have a presence.
E) customers have low brand preferences and low degrees of loyalty to seller.

Answer: E
Explanation: Entry barriers are high under the following conditions: industry incumbents enjoy
large cost advantages over potential entrants; customers have strong brand preferences and high
degrees of loyalty to seller; patents and other forms of intellectual property protection are in
place; there are strong network effects in customer demand; capital requirements are high; there
are difficulties in building a network of distributors/dealers or in securing adequate space on
retailers' shelves; there are restrictive regulatory policies; and/or there are restrictive trade
policies.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
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28) The best test of whether potential entry is a strong or weak competitive force is
A) the strength of buyer loyalty to existing brands.
B) whether the industry's driving forces make it harder or easier for new entrants to be
successful.
C) whether the strategies of industry members are well-matched to the industry's key success
factors.
D) whether there are any vacant spaces on the industry's strategic group map.
E) to ask if the industry's growth and profit prospects are strongly attractive to potential entry
candidates.

Answer: E
Explanation: As a rule, the strongest competitive forces determine the extent of the competitive
pressure on industry profitability. The threat of entry is low when incumbent firms are likely to
retaliate against new entrants with sharp price discounting and other moves designed to make
entry unprofitable.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

29) The competitive threat that outsiders will enter a market is weaker when
A) financially strong industry members send strong signals that they will launch strategic
initiatives to combat the entry of newcomers.
B) the industry's market growth is rapid.
C) the pool of entry candidates is large and some have resources that would make them
formidable market contenders.
D) newcomers can be expected to earn attractive profits.
E) buyers have little loyalty to the brands and product offerings of existing industry members.

Answer: E
Explanation: All of these indicate an attractive industry to enter with the exception of signaling
by financially strong incumbents that they will try to deter new entrants.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

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30) Which of the following is not a good example of a substitute product that triggers stronger
competitive pressures?
A) a salad as a substitute for French fries
B) wireless phones as a substitute for wired telephones
C) Coca-Cola as a substitute for Pepsi
D) snowboards as a substitute for snow skis
E) video-on-demand services from a cable TV company as a substitute for going to the movies

Answer: C
Explanation: Competitive pressures are stronger when: (1) good substitutes are readily
available and attractively priced; (2) buyers view the substitutes as comparable or better in terms
of quality, performance, and other relevant attributes; and (3) the costs that buyers incur in
switching to the substitutes are low. Brands of the same basic product constitute rival products
and not substitutes.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation

31) The competitive pressures from substitute products tend to be stronger when
A) good substitutes are readily available.
B) there are fewer number of substitute products.
C) substitutes have lower performance features.
D) buyers incur high costs in switching to substitutes.
E) substitutes are priced above the market.

Answer: A
Explanation: Competitive pressures are stronger when: (1) good substitutes are readily
available and attractively priced; (2) buyers view the substitutes as comparable or better in terms
of quality, performance, and other relevant attributes; and (3) the costs that buyers incur in
switching to the substitutes are low.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

21
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32) In which of the following instances are industry members not subject to stronger competitive
pressures from substitute products?
A) The costs to buyers of switching over to the substitutes are low.
B) Buyers are dubious about using substitutes.
C) The quality and performance of the substitutes are well-matched to what buyers need to meet
their requirements.
D) Buyer brand loyalty is weak.
E) Substitutes are readily available at competitive prices.

Answer: B
Explanation: Competitive pressures are stronger when: (1) good substitutes are readily
available and attractively priced; (2) buyers view the substitutes as comparable or better in terms
of quality, performance, and other relevant attributes; and (3) the costs that buyers incur in
switching to the substitutes are low.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

33) Determining how strong the threat of substitutes will be entails

A) identifying the relative price/performance relationship of the substitutes, the switching costs,
and the overall buyer demand for the substitute.
B) identifying the attractiveness of other industries.
C) measuring Coke as a substitute for Pepsi and applying dynamic simulation modeling
techniques.
D) adopting a substitute product concentration factor to the buyer volume.
E) judging whether industry members are capable of self-manufacturing their products.

Answer: A
Explanation: Competitive pressures are stronger when: (1) good substitutes are readily
available and attractively priced; (2) buyers view the substitutes as comparable or better in terms
of quality, performance, and other relevant attributes; and (3) the costs that buyers incur in
switching to the substitutes are low.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

22
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34) The lower the user's switching costs, the
A) harder it is for the sellers of attractive substitutes to lure buyers to their offering.
B) more intense the competitive pressures posed by substitute products.
C) less intense the competitive pressures posed by substitute products.
D) greater the bargaining power from both suppliers and influential customers.
E) lesser the bargaining power from both suppliers and influential customers.

Answer: B
Explanation: Good substitutes are readily available and attractively priced. The presence of
readily available and attractively priced substitutes creates competitive pressure by placing a
ceiling on the prices industry members can charge without risking sales erosion. This price
ceiling, at the same time, puts a lid on the profits that industry members can earn unless they find
ways to cut costs.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation

35) Whether supplier-seller relationships in an industry represent a strong or weak source of

competitive pressure is a function of
A) whether the profits of suppliers are relatively high or low.
B) the average number of suppliers that each seller/industry member purchases from.
C) how aggressively rival industry members are trying to differentiate their products.
D) whether demand for supplier products is high and they are in short supply.
E) whether the prices of the items being furnished by the suppliers are rising or falling.

Answer: D
Explanation: Whether the suppliers of industry members represent a weak or strong competitive
force depends on the degree to which suppliers have sufficient bargaining power to influence the
terms and conditions of supply in their favor. Suppliers with strong bargaining power can erode
industry profitability by charging industry members higher prices, passing costs on to them, and
limiting their opportunities to find better deals.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation

23
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36) The strength of competitive pressures that suppliers can exert on industry members is
MAINLY a function of
A) whether needed inputs are in short supply and whether suppliers provide differentiated input
that enhances performance of the product.
B) whether suppliers self-manufacture what they supply or source their items from other
manufacturers.
C) whether the industry's position in the growth cycle is favorable.
D) whether technological change in the businesses of suppliers is rapid or slow.
E) whether the needs and expectations of supplier-seller relationships are changing slowly or
rapidly.

Answer: A
Explanation: Supplier power is stronger when: demand for suppliers' products is high and the
products are in short supply; suppliers provide differentiated inputs that enhance the performance
of the industry's product; it is difficult or costly for industry members to switch their purchases
from one supplier to another; the supplier industry is dominated by a few large companies and it
is more concentrated than the industry it sells to; industry members are incapable of integrating
backward to self-manufacture items they have been buying from suppliers; suppliers provide an
item that accounts for no more than a small fraction of the costs of the industry's product; good
substitutes are not available for the suppliers' products; and/or industry members are not major
customers of suppliers.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

37) The bargaining leverage of suppliers is greater when

A) the suppliers' products/services account for a small percentage of industry members' costs.
B) industry members incur low costs in switching their purchases from one supplier to another.
C) industry members account for a big fraction of supplier's sales.
D) there is extensive seller-supplier collaboration.
E) the supplier industry is composed of a large number of relatively small suppliers.

Answer: A
Explanation: As a rule, suppliers have less bargaining leverage when their sales to members of
the industry constitute a big percentage of their total sales.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

24
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38) In which one of the following instances is supplier bargaining power and leverage not
weakened?
A) when industry members pose a credible threat of backward integration into the business of
suppliers
B) when the cost of switching from one supplier to another is low
C) when the items purchased from suppliers are in short supply
D) when the buying firms purchase in large quantities and thus are important customers of the
suppliers
E) when the item being supplied is a commodity

Answer: A
Explanation: When inputs are in short supply, suppliers tend to have stronger bargaining power
and can charge industry members higher prices (passing costs on to them) and limit opportunities
to find better deals via switching.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

39) When an industry member is a major customer of the supplier, and the relationship
(partnership) is unusually effective and mutually advantageous
A) it is rare for such partnerships to have much competitive impact on those industry members
not having such partnerships.
B) one unfortunate outcome is that it tends to give the supply partners much enhanced bargaining
power in their dealings with these industry members.
C) there is a strong likelihood such partnerships will put increased competitive pressure on those
industry members who lack productive collaborative relationships with their suppliers.
D) there is a high likelihood of such partnerships reducing competitive pressures on all industry
members, provided technological change in the suppliers' business is rapid and the item being
supplied is a commodity.
E) the usual result is to reduce competitive pressures on all industry members, provided the costs
of the items furnished by supply chain partners amount to 50 percent or more of total cost.

Answer: C
Explanation: Industry incumbents enjoy large cost advantages over competitors and potential
entrants by forming exclusive partnerships with the best and cheapest suppliers of raw materials
and components.
Difficulty: 3 Hard
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25
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40) The higher the switching costs for industry members, the more it can
A) limit supplier bargaining power.
B) enhance supplier bargaining power.
C) enhance the quality of parts and components being supplied, and in effect reduce defect rates.
D) provide important cost savings for the collaborative supplier-seller relationship.
E) limit the supply of products and/or services.

Answer: B
Explanation: Low switching costs limit supplier bargaining power by enabling industry
members to change suppliers if any one supplier attempts to raise prices by more than the costs
of switching. Thus, the higher the switching costs of industry members, the stronger the
bargaining power of their suppliers.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

41) Whether buyer-seller relationships in an industry represent a strong or weak source of

competitive pressure is a function of
A) the speed with which general economic conditions and interest rates are changing.
B) the extent to which buyers can exercise enough bargaining power to influence the conditions
of sale in their favor and whether strategic partnerships between certain industry members can
adversely affect other industry members.
C) how many buyers purchase all of their requirements from a single seller versus how many
purchase from several sellers.
D) the number of buyers versus the number of sellers.
E) whether industry members are spending more or less on advertising.

Answer: B
Explanation: Buyers with strong bargaining power can limit industry profitability by
demanding price concessions, better payment terms, or additional features and services that
increase industry members' costs. Buyer price sensitivity limits the profit potential of industry
members by restricting the ability of sellers to raise prices without losing revenue due to lost
sales.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

26
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42) Whether buyer bargaining power poses a strong or weak source of competitive pressure on
industry members depends in part on
A) the degree to which buyers have any bargaining preferences and the extent to which buyers
are price sensitive.
B) how many buyers are engaged in collaborative partnerships with sellers.
C) whether entry barriers are high or low and the size of the pool of likely entry candidates.
D) whether the overall quality of the items being furnished by industry members is rising or
falling.
E) whether demand-supply conditions represent a buyer's market or a seller's market.

Answer: E
Explanation: Weak or declining demand and the resulting excess supply create a buyers'
market, in which bargain hunting buyers are able to press for better deals and special treatment.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

43) Which of the following is not a factor that causes buyer bargaining power to be stronger?
A) Some buyers are a threat to integrate backward into the business of sellers and become an
important competitor.
B) Buyers are small and numerous relative to sellers.
C) Buyers have considerable discretion over whether and when they purchase the product.
D) Buyers purchase the item frequently and are well-informed about sellers' products, prices, and
costs.
E) The costs incurred by buyers in switching to competing brands or to substitute products are
relatively low.

Answer: B
Explanation: Competitive pressures from buyers increase when they have strong bargaining
power and are price sensitive. Buyer bargaining power is stronger when buyers are large and few
in number relative to the number of industry sellers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

27
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44) Buyer bargaining power is stronger when
A) winning the business of certain high-profile customers offers a seller important market
exposure or prestige.
B) the extent and importance of collaborative partnerships and alliances between particular
sellers and buyers are credible.
C) buyers cannot integrate backward into the product market of sellers.
D) sellers' products are differentiated, making it easy and inexpensive for buyers to switch to
competing brands.
E) the industry's products are standardized or undifferentiated.

Answer: E
Explanation: Buyer bargaining power is stronger when: buyer demand is weak in relation to
industry supply; the industry's products are standardized or undifferentiated; buyers' costs of
switching to competing products are low; buyers are large and few in number relative to the
number of industry sellers; and/or buyers pose a credible threat of integrating backward into the
business of sellers; and/or buyers are well informed about the quality, prices, and costs of sellers;
and/or buyers have the ability to postpone purchases.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

28
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45) Which of the following factors is not a relevant consideration in determining the strength of
buyer bargaining power?
A) the relationship between the buyer market and seller market
B) the degree to which the seller is a manufacturer of goods and services in substantial quantities
C) the degree to which buyers pose a credible threat to integrate backward into the product
market of sellers
D) the degree to which buyers are well-informed about a seller's products, prices, and costs
E) the degree to which industry goods are standardized and undifferentiated

Answer: B
Explanation: Buyer bargaining power is stronger when: buyer demand is weak in relation to
industry supply; the industry's products are standardized or undifferentiated; buyers' costs of
switching to competing products are low; buyers are large and few in number relative to the
number of industry sellers; and/or buyers pose a credible threat of integrating backward into the
business of sellers; and/or buyers are well informed about the quality, prices, and costs of sellers;
and/or buyers have the ability to postpone purchases.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

46) Collaborative relationships between particular sellers and buyers in an industry can represent
a source of strong competitive pressure when
A) virtually all buyers have strong brand attachments and are highly brand loyal.
B) demand for the product is growing rapidly.
C) sales are made to buyer groups with either strong bargaining power or high sensitivity.
D) sellers are racing to add the latest and greatest performance features so as to attract the
patronage of important or prestigious buyers.
E) buyers are very quality conscious.

Answer: C
Explanation: Buyers with strong bargaining power can limit industry profitability by
demanding price concessions, better payment terms, or additional features and services that
increase industry members' costs. Buyer price sensitivity limits the profit potential of industry
members by restricting the ability of sellers to raise prices without losing revenue due to lost
sales.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

29
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47) In which of the following circumstances are competitive pressures associated with the
bargaining power of buyers relatively moderate-to-weak?
A) The supply of soccer balls increases during the World Cup season.
B) Consumers can easily compare different smartphones' features over the Internet before buying
them.
C) Apple designs and manufactures its chip processors rather than buying them from Intel.
D) Dairy products are usually standardized and therefore differentiated only by price.
E) Buyers tend to delay purchases of luxury goods, such as home entertainment systems, until
they are on sale.

Answer: A
Explanation: Buyer bargaining power is stronger when: buyer demand is weak in relation to
industry supply; the industry's products are standardized or undifferentiated; buyers' costs of
switching to competing products are low; buyers are large and few in number relative to the
number of industry sellers; and/or buyers pose a credible threat of integrating backward into the
business of sellers; and/or buyers are well informed about the quality, prices, and costs of sellers;
and/or buyers have the ability to postpone purchases.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

30
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48) Competitive pressures stemming from buyer bargaining power tend to be weakest in which
of the following circumstances?
A) Most consumers vary the brands they choose for their cookware and kitchen gadgets.
B) There is a global decline in the demand for cable television services.
C) The commercial jet aviation manufacturing industry offers highly differentiated products.
D) The Internet offers a huge amount of information on a variety of products.
E) Heinz owns a metal-can manufacturing subsidiary to cut back on supplier costs.

Answer: C
Explanation: Buyer bargaining power tends to be weakest when: buyer demand is strong in
relation to industry supply; the industry's products are highly differentiated—as is surely the case
in commercial jet aviation; buyers' costs of switching to competing products are high; buyers are
plentiful in number relative to the number of industry sellers (which is also the case in the
commercial jet manufacturing industry); buyers pose no or a very limited threat of integrating
backward into the business of sellers; buyers are not well informed about the quality, prices, and
costs of sellers; and buyers have a limited ability to postpone purchases.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

31
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49) Which of the following conditions acts to weaken buyer bargaining power?
A) when buyers are unlikely to integrate backward into the business of sellers
B) when buyers purchase the item frequently and are well-informed about sellers' products,
prices, and costs
C) when the costs incurred by buyers in switching to competing brands or to substitute products
are relatively low
D) when the products of rival sellers are weakly differentiated and buyers have considerable
discretion over whether and when they purchase the product
E) when buyers are few in number and/or often purchase in large quantities

Answer: A
Explanation: Buyer bargaining power is stronger when: buyer demand is weak in relation to
industry supply; the industry's products are standardized or undifferentiated; buyers' costs of
switching to competing products are low; buyers are large and few in number relative to the
number of industry sellers; and/or buyers pose a credible threat of integrating backward into the
business of sellers; and/or buyers are well informed about the quality, prices, and costs of sellers;
and/or buyers have the ability to postpone purchases.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

50) Buyers are in position to exert strong bargaining power in dealing with sellers when
A) their costs to switch to competing brands or to substitute products are relatively high.
B) a particular seller's product delivers quality or performance that is very important to the buyer
and is not matched by other brands.
C) they buy the product infrequently or in small quantities and are not particularly well-informed
about sellers' products, prices, and costs.
D) buyer demand is growing rapidly.
E) buyers are price sensitive because the product represents a significant portion of their
purchasing budget.

Answer: E
Explanation: Price is a critical factor in the purchase decisions of low-income consumers and
companies that are barely scraping by. In such cases, their high price sensitivity limits the ability
of sellers to charge high prices.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

32
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51) Which of the following factors is not a relevant consideration in judging whether buyer
bargaining power is relatively strong or relatively weak?
A) whether certain customers offer sellers important market exposure or prestige
B) whether customers are relatively well-informed about sellers' products, prices, and costs
C) whether buyer needs and expectations are changing rapidly or slowly
D) whether sellers' products are highly differentiated, making it troublesome or costly for buyers
to switch to competing brands or to substitute products
E) whether buyers pose a major threat to integrate backward into the product market of sellers

Answer: C
Explanation: Buyer bargaining power is stronger when: buyer demand is weak in relation to
industry supply; the industry's products are standardized or undifferentiated; buyers' costs of
switching to competing products are low; buyers are large and few in number relative to the
number of industry sellers; and/or buyers pose a credible threat of integrating backward into the
business of sellers; and/or buyers are well informed about the quality, prices, and costs of sellers;
and/or buyers have the ability to postpone purchases.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

33
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52) Not all buyers of an industry's product have equal degrees of bargaining power with sellers
because
A) sellers in an industry provide similar products and generally their cost structures are different
because of competitive advantages in their operation.
B) some sellers may be less sensitive than others to price, quality, or service differences.
C) along the various stages of the value chain sellers are conducive to earning attractive profits.
D) the industry is a highly cohesive structure with limited fragmentation and few industry
members.
E) sellers are large and few in number relative to the number of buyers.

Answer: B
Explanation: Buyer bargaining power is stronger when: buyer demand is weak in relation to
industry supply; the industry's products are standardized or undifferentiated; buyers' costs of
switching to competing products are low; buyers are large and few in number relative to the
number of industry sellers; and/or buyers pose a credible threat of integrating backward into the
business of sellers; and/or buyers are well informed about the quality, prices, and costs of sellers;
and/or buyers have the ability to postpone purchases.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

53) A competitive environment where there is weak to moderate rivalry among sellers, high
entry barriers, weak competition from substitute products, and little bargaining leverage on the
part of both suppliers and customers
A) lacks powerful driving forces.
B) gives each industry competitor the best potential for building sustainable competitive
advantage over rival firms.
C) makes it challenging for industry members to compete successfully unless they can strongly
differentiate their products.
D) is conducive to industry members earning attractive profits.
E) requires that industry members have low costs in order to be competitively successful.

Answer: D
Explanation: When the overall impact of the five competitive forces is moderate to weak, an
industry is attractive in the sense that the average industry member can reasonably expect to earn
good profits and a nice return on investment.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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54) A competitive environment where there is strong rivalry among sellers, low entry barriers,
strong competition from substitute products, and considerable bargaining leverage on the part of
both suppliers and customers
A) is competitively unattractive from the standpoint of earning good profits.
B) offers little ability to build a sustainable competitive advantage.
C) is highly conducive to achieving strong product differentiation and high customer loyalty to
the company's brand.
D) offers moderate to good prospects for making a reasonable profit and building a sustainable
competitive advantage.
E) requires that industry members have a strongly differentiated product offering in order to be
profitable.

Answer: A
Explanation: The most extreme case of a competitively unattractive industry occurs when all
five forces are producing strong competitive pressures: rivalry among sellers is vigorous, low
entry barriers allow new rivals to gain a market foothold, competition from substitutes is intense,
and both suppliers and buyers are able to exercise considerable leverage.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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55) The stronger the collective impact of competitive pressures associated with the five
competitive forces,
A) the stronger are the industry's driving forces.
B) the greater number of companies that can achieve a competitive advantage via differentiation.
C) the larger the number of competitive advantage opportunities for industry members.
D) the greater the number of industry key success factors.
E) the fewer companies that can achieve a competitive advantage via anything other than being
the industry's low-cost leader.

Answer: A
Explanation: All other things being equal and as a rule, the stronger the collective impact of the
five competitive forces, the lower the combined profitability of industry participants.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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56) Based on an analysis of the five competitive forces, in which of the following industries is
profitability likely to be lowest?
A) pharmaceuticals
B) wireless lighting systems
C) wearable fitness and health monitors
D) pizza restaurants
E) delivery services using drones

Answer: D
Explanation: As a rule, the strongest competitive forces determine the extent of the competitive
pressure on industry profitability. All other things being equal and as a rule, the stronger the
collective impact of the five competitive forces, the lower the combined profitability of industry
participants—and this is particularly true of the saturated, mature pizza restaurant industry in
comparison with the others listed, each of which have mitigated the power of some competitive
forces to achieve above-average returns.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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57) Based on an analysis of the five competitive forces, in which of the following industries is
profitability likely to be highest?
A) apparel
B) tire manufacturing
C) electric and gas utilities
D) commercial airlines
E) video streaming services

Answer: E
Explanation: All other things being equal and as a rule, the weaker the collective impact of the
five competitive forces, the higher the combined profitability of industry participants—and this
is particularly true of the streaming video industry in comparison with the others listed, each of
which face tremendous competitive pressures that dampen profits.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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58) As a rule, the collective impact of competitive pressures associated with the five competitive
forces
A) determines the strength of the industry's driving forces.
B) determines the extent of the competitive pressure on industry profitability.
C) means that fewer companies can achieve a competitive advantage via anything other than
being the industry's low-cost leader.
D) means there will be a larger number of competitive advantage opportunities for industry
members.
E) means there will be a greater number of industry key success factors.

Answer: B
Explanation: As a rule, the strongest competitive forces determine the extent of the competitive
pressure on industry profitability.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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59) A company's strategy is increasingly effective the more it can match the company strategy to
competitive conditions, so the firm can
A) pursue avenues that expose the firm to as many of the different competitive pressures as
possible.
B) shift the competitive battle in favor of the firm by altering the underlying factors driving the
five forces.
C) pursue ways to identify and complement the five forces' contradictions and inferences to
attract competitive growth opportunities.
D) pursue avenues that promote strategic thinking about how to contest competitor strengths and
weaknesses and to create a checklist of potential profitability preferences.
E) shift societal concerns, attitudes, and lifestyles by altering the pattern of competition.

Answer: B
Explanation: Effectively matching a company's business strategy to prevailing competitive
conditions has two aspects: (1) pursuing avenues that shield the firm from as many of the
different competitive pressures as possible and (2) initiating actions calculated to shift the
competitive forces in the company's favor by altering the underlying factors driving the five
forces.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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60) The value net framework includes an analysis of
A) the firm, substitutes, suppliers, customers, and competitors.
B) the firm, suppliers, customers, competitors, and driving forces.
C) substitutes, suppliers, customers, competitors, and driving forces.
D) the firm, suppliers, customers, competitors, and complementors.
E) substitutes, suppliers, customers, competitors, and potential entrants.

Answer: B
Explanation: The value net framework conceptual model focuses on the industry interactions
with a particular company. The components of the framework are competitors (which include
entrants and substitutes), customers, suppliers, and complementors. The new category not found
in the five forces framework, complementors, are those producers of complementary products
that enhance the value of an individual firm.
Difficulty: 2 Medium
Topic: Value Net Framework
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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61) Which of the following is not an example of a complementor?

A) microprocessors and laptops
B) automobiles and gasoline stations
C) theme parks and hotels
D) gyms and fitness equipment
E) newspapers and Internet news providers

Answer: E
Explanation: Complementors are the producers of complimentary products, not direct
substitutes (as is the case for newspapers and Internet news providers). Complementors produce
products that enhance the value of the focal firm's product when they are used together.
Difficulty: 2 Medium
Topic: Complementors
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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62) The "driving forces" in an industry
A) are usually triggered by changing technology or stronger learning/experience curve effects.
B) usually are spawned by growing demand for the product, the outbreak of price-cutting, and
big reductions in entry barriers.
C) are major underlying causes of changing industry and competitive conditions and have the
biggest influences in reshaping the industry landscape and altering competitive conditions.
D) appear when an industry begins to mature but are seldom present during early stages of the
industry life cycle.
E) are usually triggered by shifting buyer needs and expectations or by the appearance of new
substitute products.

Answer: C
Explanation: The most powerful of the change agents are called driving forces because they
have the biggest influences in reshaping the industry landscape and altering competitive
conditions.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
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63) Industry conditions change because of

A) such powerful driving forces as swings in buyer demand, changing interest rates, ups and
downs in the economy, and higher/lower entry barriers.
B) newly emerging industry threats and industry opportunities that alter the composition of the
industry's strategic groups.
C) newly emerging industry key success factors.
D) important forces enticing or pressuring certain industry participants (competitors, customers,
suppliers) to alter their actions in important ways.
E) changes in the barriers to entry and the degree of competition from substitute products.

Answer: D
Explanation: Industry and competitive conditions change because forces are enticing or
pressuring certain industry participants (competitors, customers, suppliers, complementors) to
alter their actions in important ways.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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39
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64) You have been asked to analyze the Value Net of the major regions of the California wine
industry and have observed close relationships between wineries and local hospitality businesses
(such as restaurants and lodging facilities) in the regions under study. Those local hospitality
businesses can be said to be
A) cohabitors.
B) competitors.
C) cooperators.
D) complementors.
E) customers.

Answer: D
Explanation: See Figure 3.9. Complementors are the producers of complementary products or
services, which are products or services that enhance the value of the focal firm's products when
they are used together.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Apply
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65) One of the steps of driving-forces analysis is to identify which

A) strategy changes a company may need to make to prepare for the impacts of the driving
forces.
B) strategic group is the most powerful.
C) industry member is likely to become (or remain) the industry leader and why.
D) key success factors are most likely to help their company gain a competitive advantage.
E) of the five competitive forces will be the strongest driver of industry change.

Answer: A
Explanation: Driving-forces analysis has three steps: (1) identifying what the driving forces are,
(2) assessing whether the drivers of change are, on the whole, acting to make the industry more
or less attractive, and (3) determining what strategy changes are needed to prepare for the impact
of the driving forces. All three steps merit further discussion.
Difficulty: 1 Easy
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
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40
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66) Which of the following is not generally a "driving force" capable of producing fundamental
changes in industry and competitive conditions?
A) changes in the long-term industry growth rate
B) increasing globalization of the industry
C) product innovation and technological change
D) movement in the economy and in interest rates
E) regulatory influences and government policy changes

Answer: D
Explanation: Some drivers of change are unique and specific to a particular industry situation,
but most drivers of industry and competitive change fall into one of the following categories:
changes in an industry's long-term growth rate; increasing globalization; emerging new Internet
capabilities and applications; shifts in buyer demographics; technological change and
manufacturing process innovation; product innovation; entry or exit of major firms; diffusion of
technical know-how across companies and countries; changes in cost and efficiency; reductions
in uncertainty and business risk; regulatory influences and government policy changes; and/or
changing societal concerns, attitudes, and lifestyles.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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41
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67) Which of the following is most unlikely to qualify as driving forces?
A) changes in the long-term industry growth rate, the entry or exit of major firms, and changes in
cost and efficiency
B) increasing globalization of the industry and product innovation
C) new Internet technology applications, new government regulations, and significant changes in
government policy toward the industry
D) increasing efforts to collaborate with suppliers via strategic alliances and partnerships,
escalating risk levels and normalization of cost and efficiency in the industry
E) marketing innovations and changes in who buys the industry's product and how they use it

Answer: D
Explanation: Some drivers of change are unique and specific to a particular industry situation,
but most drivers of industry and competitive change fall into one of the following categories:
changes in an industry's long-term growth rate; increasing globalization; emerging new Internet
capabilities and applications; shifts in buyer demographics; technological change and
manufacturing process innovation; product innovation; entry or exit of major firms; diffusion of
technical know-how across companies and countries; changes in cost and efficiency; reductions
in uncertainty and business risk; regulatory influences and government policy changes; and/or
changing societal concerns, attitudes, and lifestyles.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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42
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68) Which of the following does not qualify as potential driving forces capable of inducing
fundamental changes in industry and competitive conditions?
A) changes in who buys the product and how they use it, and changes in the long-term industry
growth rate
B) changes brought about by the entry or exit of major firms, product innovation, and marketing
innovation and cost efficiency
C) changes in the economic power and bargaining leverage of customers and suppliers, growing
supplier-seller collaboration, and growing buyer-seller collaboration
D) changes in buyer preferences for differentiated products instead of mostly standardized or
identical products
E) changes in economies of scale and experience curve effects brought on by changes in
manufacturing technology and new Internet capabilities

Answer: C
Explanation: Some drivers of change are unique and specific to a particular industry situation,
but most drivers of industry and competitive change fall into one of the following categories:
changes in an industry's long-term growth rate; increasing globalization; emerging new Internet
capabilities and applications; shifts in buyer demographics; technological change and
manufacturing process innovation; product innovation; entry or exit of major firms; diffusion of
technical know-how across companies and countries; changes in cost and efficiency; reductions
in uncertainty and business risk; regulatory influences and government policy changes; and/or
changing societal concerns, attitudes, and lifestyles.
Difficulty: 3 Hard
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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43
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69) Which of the following is most. likely to qualify as a driving force?
A) increases in price cutting by rival sellers and the launch of major new advertising campaigns
by one or more rivals
B) successful introduction of innovative new products or new ways to market products
C) an increase in the prices of substitute products
D) decisions on the part of industry's three biggest competitors not to pursue a strategy of
striving to be the industry's low-cost leader
E) decisions by one or more outsiders not to attempt to enter the industry

Answer: B
Explanation: An ongoing stream of product innovations tends to alter the pattern of competition
in an industry by attracting more first-time buyers, rejuvenating industry growth, and/or
increasing product differentiation, with concomitant effects on rivalry, entry threat, and buyer
power. Product innovation has been a key driving force in industries such as smartphones, video
games, and prescription drugs.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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70) Which of the following is not a common type of driving force?

A) reductions in uncertainty and business risk
B) changing societal concerns, attitudes, and lifestyles
C) diffusion of technical know-how across companies and countries
D) increasing efforts to collaborate closely with suppliers
E) advances in technology and manufacturing process innovation

Answer: D
Explanation: Some drivers of change are unique and specific to a particular industry situation,
but most drivers of industry and competitive change fall into one of the following categories:
changes in an industry's long-term growth rate; increasing globalization; emerging new Internet
capabilities and applications; shifts in buyer demographics; technological change and
manufacturing process innovation; product innovation; entry or exit of major firms; diffusion of
technical know-how across companies and countries; changes in cost and efficiency; reductions
in uncertainty and business risk; regulatory influences and government policy changes; and/or
changing societal concerns, attitudes, and lifestyles.
Difficulty: 1 Easy
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Remember
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44
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71) Increasing globalization of the ride-share industry can be a driving force because
A) the services provided by foreign ride-share competitors are nearly always cheaper or of better
quality than those of domestic companies.
B) foreign ride-share operators typically have lower costs, more technological expertise, and
greater social network integration capabilities than domestic firms.
C) ride-share companies need to spread their operating reach into more and more country
markets to meet emerging consumer demand and take advantage of available operating
opportunities.
D) it results in ride-share companies having fewer competitors and a strategic group map with
fewer circles.
E) market growth rates rise, product innovation accelerates, and new ride-share startups are
increasingly likely to enter the industry.

Answer: C
Explanation: Globalization can be precipitated by such factors as the blossoming of consumer
demand in developing countries, the availability of lower-cost foreign inputs, and the reduction
of trade barriers, as has occurred recently in many parts of Latin America and Asia. The forces of
globalization are sometimes such a strong driver that companies find it highly advantageous, if
not necessary, to spread their operating reach into more and more country markets.
Difficulty: 3 Hard
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

72) Driving-forces analysis helps managers identify whether

A) the collective impact of the driving forces will act to increase/decrease market demand,
increase/decrease competition, and raise/lower industry profitability in the years ahead.
B) it will become more or less important to aim the company's strategy at being the industry's
low-cost producer.
C) the driving forces will have a bigger impact on company profitability than competitive forces.
D) the industry is likely to become more or less vertically integrated and why.
E) competitive advantages are likely to grow or diminish in importance.

Answer: A
Explanation: The most important part of driving-forces analysis is to determine whether the
collective impact of the driving forces will increase or decrease market demand, make
competition more or less intense, and lead to higher or lower industry profitability.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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73) Evaluating the industry's driving forces, as a whole, requires understanding their influence on
the attractiveness of industry environment and generally are
A) determined by the sizes of strategic groups and the power of rival firms' competitive
strategies.
B) defined in ways that will strengthen or weaken market demand, competition, and industry
profitability in future years.
C) the cause of a reduction in the bargaining power of buyers.
D) triggered by movement in the economy, higher or lower interest rates, or important new
strategic alliances.
E) triggered by such factors as growing competitive pressures from substitute products, and the
efforts of rival firms to employ new or different offensive strategies.

Answer: B
Explanation: The most important part of driving-forces analysis is to determine whether the
collective impact of the driving forces will increase or decrease market demand, make
competition more or less intense, and lead to higher or lower industry profitability.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

74) In analyzing driving forces, the strategist's role is to

A) identify the driving forces and evaluate their impact on demand for the industry's product, the
intensity of competition, and industry profitability.
B) predict future marketing innovations and how fast the industry is likely to globalize.
C) evaluate what stage of the life cycle the industry is in and when it is likely to move to the next
stage.
D) determine who is likely to exit the industry and what changes can be expected in the
industry's strategic group map.
E) forecast fluctuations in product demand and how buyer needs will most likely change.

Answer: A
Explanation: The most important part of driving-forces analysis is to determine whether the
collective impact of the driving forces will increase or decrease market demand, make
competition more or less intense, and lead to higher or lower industry profitability.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

46
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75) Driving-forces analysis typically does not include
A) determining whether forces are acting to cause fundamental changes in industry conditions
and/or the industry's competitiveness.
B) determining whether forces are acting to cause industry rivals to shift to a different strategic
group.
C) determining whether forces are acting to strengthen or weaken market demand.
D) determining whether forces are acting to make competition more or less intense.
E) determining whether forces are acting to raise or lower industry profitability.

Answer: B
Explanation: Some drivers of change are unique and specific to a particular industry situation,
but most drivers of industry and competitive change fall into one of the following categories:
changes in an industry's long-term growth rate; increasing globalization; emerging new Internet
capabilities and applications; shifts in buyer demographics; technological change and
manufacturing process innovation; product innovation; entry or exit of major firms; diffusion of
technical know-how across companies and countries; changes in cost and efficiency; reductions
in uncertainty and business risk; regulatory influences and government policy changes; and/or
changing societal concerns, attitudes, and lifestyles.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

76) The real payoff of driving forces is to help managers understand

A) what strategy changes are needed to prepare for the impacts of the driving forces.
B) the overall strength of the five competitive forces.
C) whether the industry's strategic group map will be static or dynamic.
D) what conditions exist in the economy at large.
E) the extent to which rivals have more than two competitively valuable competencies or
capabilities.

Answer: A
Explanation: The real payoff of driving-forces analysis is to help managers understand what
strategy changes are needed to prepare for the impacts of the driving forces.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

47
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77) Driving-forces analysis has
A) speculative value because it compels the firm to drive strategic intent and collective choice
into operating practices.
B) theoretical value because it allows managers to visualize the many different dimensions of the
preferred forces that allow for industry functionality.
C) practical value and is basic to the task of thinking strategically about where the industry is
headed and how to prepare for the changes ahead.
D) no real analytical value because the driving forces are already established in the marketplace
and it is too late to make astute and timely strategy adjustments.
E) perceived value and is associated with identifying the close and distant rivals within an
operating industry.

Answer: C
Explanation: Driving-forces analysis is not something to take lightly; it has practical value and
is basic to the task of thinking strategically about where the industry is headed and how to
prepare for the changes ahead.
Difficulty: 3 Hard
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

78) Which of the following driving forces would have the least impact on the attractiveness of
the automobile industry?
A) changes in the long-term industry growth rate
B) entry or exit of major firms
C) shifts in who buys the product and how the product is used
D) changes in costs and efficiency
E) regulatory influences and government policy changes

Answer: C
Explanation: Of the forces listed above, all except social/demographic changes would have a
major impact on the attractiveness of the automobile industry. There is no apparent likelihood of
a shift in who purchases automotive vehicles or what people are likely to purchase for personal
travel.
Difficulty: 3 Hard
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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79) What is the best technique for revealing the different market or competitive position that
rival firms occupy in the industry?
A) strategic group mapping
B) PESTEL analysis
C) five forces framework
D) the Value Net framework
E) competitor analysis

Answer: A
Explanation: Understanding which companies are strongly positioned and which are weakly
positioned is an integral part of analyzing an industry's competitive structure. The best technique
for revealing the market positions of industry competitors is strategic group mapping.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
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80) A strategic group

A) consists of those industry members that are growing at about the same rate and have similar
product line breadth.
B) includes all rival firms having comparable profitability.
C) is a cluster of industry members with similar competitive approaches and market positions in
the market.
D) consists of those firms whose market shares are about the same size.
E) is made up of those firms having comparable profit margins.

Answer: C
Explanation: A strategic group consists of those industry members with similar competitive
approaches and positions in the market. Companies in the same strategic group can resemble one
another in a variety of ways.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Remember
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81) Not all positions on a strategic group map are equally attractive because
A) small strategic groups are always less profitable than large strategic groups.
B) entry and exit barriers are different for each strategic group.
C) across-group rivalry is always weakest at the outer edge of the strategic group map.
D) industry-driving forces and competitive pressures favor some groups and disadvantage others.
E) key success factors are substantially different for differently positioned industry participants.

Answer: D
Explanation: Some strategic groups are more favorably positioned than others because they
confront weaker competitive forces and/or because they are more favorably impacted by
industry-driving forces.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

82) When all sellers pursue essentially identical strategies and have similar market positions
A) they remain subject to different driving forces.
B) they place about the same emphasis on various distribution channels.
C) they use the same key success factors to differentiate their products.
D) the industry can be said to contain one strategic group.
E) they still must possess customer service attributes that differentiate them from one another in
the marketplace.

Answer: D
Explanation: A strategic group consists of those industry members with similar competitive
approaches and positions in the market. Companies in the same strategic group can resemble one
another in a variety of ways.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
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83) Strategic group mapping is a visual technique for displaying
A) how many rivals are pursuing each type of strategy.
B) which companies have the biggest market share and who the industry leader really is.
C) the different market or competitive positions that rival firms occupy in an industry and for
identifying each rival's closest competitors.
D) which companies have the highest degrees of brand loyalty.
E) which companies have failing business models.

Answer: C
Explanation: Evaluating strategy options entails examining what strategic groups exist,
identifying the companies within each group, and determining if a competitive "white space"
exists where industry competitors are able to create and capture altogether new demand.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation

84) Which of the following pairs of variables are least likely to be useful in drawing a strategic
group map?
A) geographic market scope and degree of vertical integration
B) brand name reputation and distribution channel emphasis
C) product quality and product-line breadth
D) level of profitability and size of market share
E) price/perceived quality and image range and the extent of buyer appeal

Answer: D
Explanation: Typical variables used in creating strategic group maps are price/quality range
(high, medium, low), geographic coverage (local, regional, national, global), product-line
breadth (wide, narrow), degree of service offered (no frills, limited, full), use of distribution
channels (retail, wholesale, Internet, multiple), degree of vertical integration (none, partial, full),
and degree of diversification into other industries (none, some, considerable).
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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85) The concept of strategic groups is relevant to industry and competitive analysis because
A) firms in the same strategic groups are rarely close competitors—a firm's closest competitors
are usually in distant strategic groups.
B) strategic group maps help identify how each competing firm is positioned and the relationship
to its closest competitors.
C) competition grows in intensity as the number and diversity of the strategic groups in an
industry increases.
D) the profit potential of firms in the same strategic group is usually very similar.
E) competitive pressures tend to be weaker within strategic groups than across strategic groups.

Answer: B
Explanation: Evaluating strategy options entails examining what strategic groups exist,
identifying the companies within each group, and determining if a competitive "white space"
exists where industry competitors are able to create and capture altogether new demand.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

86) When drawing a strategic group map

A) one strategic variable and one financial variable should be used as axes for the map.
B) it is important for the variables used as axes to be highly correlated.
C) the best variables to use as axes for the map are those that identify the competitive
characteristics that delineate strategic approaches used in the industry.
D) it is important to use price as the variable for the vertical axis.
E) the primary objective is to determine which strategic groups are profitable and which are not.

Answer: C
Explanation: Several guidelines need to be observed in creating strategic group maps. First, the
two variables selected as axes for the map should not be highly correlated. Second, the variables
chosen as axes for the map should reflect important differences among rival approaches. Third,
the variables used as axes do not have to be either quantitative or continuous. Fourth, drawing
the sizes of the circles on the map proportional to the combined sales of the firms in each
strategic group allows the map to reflect the relative sizes of each strategic group. Fifth, if more
than two good variables can be used as axes for the map, then it is wise to draw several maps to
give different exposures to the competitive positioning relationships present in the industry's
structure.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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87) Which of the following is not an appropriate guideline for developing a strategic group map
for a given industry?
A) The variables chosen as axes for the map should indicate important differences among rival
approaches.
B) The variables chosen as axes for the map do not have to be either quantitative or continuous.
They can be discrete variables.
C) The variables chosen as axes for the map should be highly correlated.
D) Several maps should be drawn if more than one pair of variables give different exposures to
the competitive positioning relationships present in the industry structure.
E) The sizes of the circles on the map should be drawn proportional to the combined sales of the
firms in each strategic group.

Answer: C
Explanation: Several guidelines need to be observed in creating strategic group maps. First, the
two variables selected as axes for the map should not be highly correlated. Second, the variables
chosen as axes for the map should reflect important differences among rival approaches. Third,
the variables used as axes do not have to be either quantitative or continuous. Fourth, drawing
the sizes of the circles on the map proportional to the combined sales of the firms in each
strategic group allows the map to reflect the relative sizes of each strategic group. Fifth, if more
than two good variables can be used as axes for the map, then it is wise to draw several maps to
give different exposures to the competitive-positioning relationships present in the industry's
structure.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Remember
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88) With the aid of a strategic group map for the pizza segment of the food service industry, one
can
A) identify easily the entry and exit barriers for each strategic group and intersegment
competition with other casual restaurants.
B) pinpoint precisely which pizza restaurants are in profitable strategic groups and which are not.
C) identify which competitive forces are strong and which are weak for pizza restaurants.
D) measure accurately whether across-group rivalry among pizza establishments is stronger than
within-group rivalry, and vice versa.
E) reveal which pizza establishments are close competitors and which are distant rivals, and that
not all positions on the map are equally attractive.

Answer: E
Explanation: Strategic group maps are revealing in several respects. The most important has to
do with identifying which industry members are close rivals and which are distant rivals. Firms
in the same strategic group, in this instance, many local, independent pizza restaurants are the
closest rivals; the next closest rivals, that is, chains such as Domino's, Little Caesar's, Papa
John's, and Pizza Hut are in immediately adjacent groups. Often, firms in strategic groups that
are far apart on the map, such as other quick-service restaurants that also happen to serve pizza
among a larger array of menu offerings, such as Olive Garden, do not compete directly.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
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89) One of the things that can be gleaned from a strategic group map of industry rivals is
A) which rivals have been in business longer and thus have greater access to experience curve
effects.
B) which rivals have newer manufacturing facilities and thus have achieved greater product
quality.
C) which strategic groups have the highest profit margins and the highest customer switching
costs and thus represent key operating characteristics.
D) that some strategic groups are more favorably positioned than others because they confront
weaker competitive forces and/or because they are more favorably impacted by industry driving
forces.
E) which strategic groups are currently being shunned by customers because of high prices and
relatively low product quality.

Answer: D
Explanation: Some strategic groups are more favorably positioned than others because they
confront weaker competitive forces and/or because they are more favorably impacted by industry
driving forces.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

90) Strategic group map analysis does not entail drawing conclusions about
A) where on the map is the best place to be and why.
B) which companies/strategic groups are destined to prosper because of their positions.
C) which companies/strategic groups seem destined to struggle.
D) what accounts for why some parts of the map are better than others.
E) where on the map is the easiest position to shift from to a more favorably situated position.

Answer: E
Explanation: Part of strategic group map analysis always entails drawing conclusions about
where on the map is the best place to be and why. Which companies/strategic groups are
destined to prosper because of their positions? Which companies/strategic groups seem destined
to struggle? What accounts for why some parts of the map are better than others?
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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91) The payoff of good scouting reports on rivals is an improved ability to
A) anticipate what moves rivals are likely to make next.
B) determine which rivals are in the best strategic group.
C) figure out how many key success factors a rival has.
D) determine whether a rival is gaining or losing market share.
E) determine whether a rival has the best strategy and is the industry leader.

Answer: A
Explanation: Studying competitors' past behavior and preferences provides a valuable assist in
anticipating what moves rivals are likely to make next and outmaneuvering them in the
marketplace.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

92) To succeed in predicting a competitor's next moves, company strategists need to appraise a
rival's
A) current strategy, financial health, market share, resources and capabilities.
B) strategic group, assumptions, resources and capabilities, financial health.
C) current strategy, assumptions, resources and capabilities, objectives.
D) market share, strategic group, driving forces, assumptions.
E) resources and capabilities, assumptions, current strategy, objectives.

Answer: A
Explanation: The four indicators that help company strategists predict a competitor's next
moves are: (1) a rival's current strategy, (2) objectives, (3) resources and capabilities, and (4) its
assumptions about itself and the industry. According to Michael Porter, a strategic profile of a
rival that provides good clues to its behavioral proclivities can be constructed by characterizing
the rival along these four dimensions.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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93) Having good competitive intelligence about rivals' strategies and moves to improve their
situation is important because
A) it identifies who the industry's current market share leaders are.
B) it allows a company to anticipate what moves rivals are likely to make next and to craft its
own strategic moves with some confidence.
C) it helps identify which rival is in which strategic group.
D) it enables company managers to determine which rival has the worst strategy and how to
avoid making the same strategy mistakes.
E) it enables more accurate predictions about how long it will take a particular rival to copy most
of what the strategy leader is doing.

Answer: B
Explanation: Doing the necessary detective work can be time consuming, but scouting
competitors well enough to anticipate their next moves allows managers to prepare effective
countermoves (perhaps even beat a rival to the punch) and to take rivals' probable actions into
account in crafting their own best course of action.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

94) Whole Foods has invested heavily into a system for gathering competitive intelligence about
the strategic direction and likely moves of key rivals in the supermarket industry. Doing so
allows Whole Foods to determine which rivals are pursuing all of the following, except
A) the best strategy.
B) flawed or weak strategies.
C) strong performance objectives.
D) reliable resources and capabilities.
E) similar competitive approaches.

Answer: E
Explanation: Michael Porter's Framework for Competitor Analysis points to four indicators of a
rival's likely strategic moves and countermoves. These include (1) a rival's current strategy, (2)
objectives, (3) resources and capabilities, and (4) assumptions about itself and the industry. A
strategic profile of a rival that provides good clues to its behavioral proclivities can be
constructed by characterizing the rival along these four dimensions.
Difficulty: 3 Hard
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Analyze
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95) Angela and Jeff are co-owners of five specialty cupcake baking stores in their region. Which
of the following questions would not help them to predict the next strategic moves and
countermoves of their rivals?
A) Which mode of transport does the rival's supplier use?
B) How does the rival manage door-to-door deliveries at no extra cost?
C) What percentage of customers frequent the rival's store?
D) Why are the rival's cupcakes so popular among customers?
E) How frequently does their rival fulfill special orders for custom cupcakes and how large are
those special orders?

Answer: A
Explanation: Michael Porter's Framework for Competitor Analysis points to four indicators of a
rival's likely strategic moves and countermoves. These include a rival's current strategy,
objectives, resources and capabilities, and assumptions about itself and the industry. A strategic
profile of a rival that provides good clues to its behavioral proclivities can be constructed by
characterizing the rival along these four dimensions.
Difficulty: 3 Hard
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

96) A rival's strategic moves and countermoves are

A) indicators for the visualization of strategic mapping techniques.
B) enabled and constrained by the set of capabilities they have at hand.
C) measured by the extent to which they can unveil financial objectives.
D) responses to the broader definition of the industry opportunities.
E) signs of the competitive pressures from the industry.

Answer: B
Explanation: A rival's strategic moves and countermoves are both enabled and constrained by
the set of resources and capabilities the rival has at hand. Thus a rival's resources and capabilities
(and efforts to acquire new resources and capabilities) serve as a strong signal of future strategic
actions (and reactions to your company's moves). Assessing a rival's resources and capabilities
involves sizing up not only its strengths in this respect but its weaknesses as well.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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97) The extent to which firms are meeting objectives suggests they
A) are likely to prosper in the future.
B) are likely to continue their present strategy with only minor fine-tuning.
C) are virtually certain to make fresh strategic moves.
D) recognize the status quo as the best course of action to adopt
E) realize that refocusing will ensure competitive gains.

Answer: B
Explanation: Rivals with good financial performance are likely to continue their present
strategy with only minor fine tuning. Poorly performing rivals are virtually certain to make fresh
strategic moves.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

98) Competitive intelligence can be gleaned from

A) company press releases, company websites, management presentations, annual reports, and
10-K filings.
B) SWOT analysis, PESTLE analysis, KSF analysis, and driving forces analysis.
C) strategic group maps, Value Net analysis, and five force analysis.
D) financial ratio analysis, KSF analysis, driving forces analysis, and five forces analysis.
E) KSF analysis, Value Net analysis, and driving forces analysis.

Answer: A
Explanation: Routes to gathering intelligence on competitors include perusing company
websites, company press releases, management presentations, annual reports, and 10-K filings.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
AACSB: Knowledge Application
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99) The key success factors in an industry
A) are those competitive factors that most affect industry members' abilities to prosper in the
marketplace—the particular strategy elements, product attributes, operational approaches,
resources, and competitive capabilities that spell the difference between being a strong
competitor and a weak one, and between profit and loss.
B) are determined by the industry's driving forces, which are essential to surviving and thriving
in the industry.
C) hinge on how many different strategic groups the industry has operating within the industry
and their level of profitability and sustainable advantages.
D) depend on how many rivals are trying to move from one strategic group to another without
losing momentum.
E) are a function of such considerations as how many firms are in the industry, how many have
market shares above 5 percent, and whether the business models being used are similar or
diverse.

Answer: A
Explanation: An industry's key success factors (KSFs) are those competitive factors that most
affect industry members' ability to survive and prosper in the marketplace: the particular strategy
elements, product attributes, operational approaches, resources, and competitive capabilities that
spell the difference between being a strong competitor and a weak competitor, and between
profit and loss.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Remember
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100) An industry's key success factors can always be deduced by asking what factors
A) are a function of market share, entry barriers, and economies of scale, degree of vertical
integration, and industry profitability that are advantageous.
B) vary according to whether an industry has high or low long-term attractiveness.
C) such as product attributes and service characteristics are crucial, and what resources and
competitive capabilities are needed, and what shortcomings are evident to put a company at a
competitive disadvantage.
D) can be determined from studying the winning strategies of the industry leaders and ruling out
as potential key success factors the strategy elements of those firms considered to have losing
strategies.
E) depend on the relative competitive strengths of the industry leaders and how vulnerable they
are to competitive attack.

Answer: C
Explanation: Regardless of the circumstances, an industry's key success factors can always be
deduced by asking the same three questions.

1. On what basis do buyers of the industry's product choose between the competing brands of
sellers? That is, what product attributes and service characteristics are crucial?
2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and
competitive capabilities must a company have to be competitively successful?
3. What shortcomings are almost certain to put a company at a significant competitive
disadvantage?
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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101) In identifying an industry's key success factors, strategists should
A) try to single out all factors that play a major role in shaping whether buyer demand grows
rapidly or slowly.
B) consider on what basis customers choose between competing brands, what resources and
competitive capabilities firms need to be competitively successful, and what shortcomings are
almost certain to put a company at a significant competitive disadvantage.
C) consider whether the number of strategic groups is increasing or decreasing and whether the
five competitive forces are powerful or relatively weak.
D) consider what it will take to overtake the company with the industry's overall best strategy.
E) focus their attention on what it will take to capitalize on the impacts of the industry's driving
forces.

Answer: B
Explanation: Regardless of the circumstances, an industry's key success factors can always be
deduced by asking the same three questions.

1. On what basis do buyers of the industry's product choose between the competing brands of
sellers? That is, what product attributes and service characteristics are crucial?
2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and
competitive capabilities must a company have to be competitively successful?
3. What shortcomings are almost certain to put a company at a significant competitive
disadvantage?
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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102) Which of the following is not a question asked to deduce a marketing-related key success
factor?
A) What are the industry product R&D capabilities and expertise in product design?
B) On what basis do buyers choose between the competing brands of sellers?
C) What product attributes and service characteristics are crucial?
D) What resources must a company have to be competitive?
E) What shortcomings are almost certain to put a company at a significant disadvantage?

Answer: A
Explanation: Regardless of the circumstances, an industry's key success factors can always be
deduced by asking the same three questions.

1. On what basis do buyers of the industry's product choose between the competing brands of
sellers? That is, what product attributes and service characteristics are crucial?
2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and
competitive capabilities must a company have to be competitively successful?
3. What shortcomings are almost certain to put a company at a significant competitive
disadvantage?
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation

103) Which of the following can aid company strategists in identifying key success factors in
their industry?
A) global distribution capabilities of suppliers
B) product attributes and service characteristics that buyers consider to be crucial
C) low switching costs of buyers and suppliers
D) accurate filling of buyer orders
E) short delivery time capability

Answer: B
Explanation: An industry's key success factors (KSFs) are those competitive factors that most
affect industry members' ability to survive and prosper in the marketplace: the particular strategy
elements, product attributes, operational approaches, resources, and competitive capabilities that
spell the difference between being a strong competitor and a weak competitor—and between
profit and loss. Of those, strategists must consider what is crucial to buyers in an industry in
making the purchase decision among competing brands' products and services.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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104) Correctly diagnosing an industry's key success factors
A) points to those things that every firm in the industry needs to attend to in order to develop
product propositions.
B) hints at the firm's ability to generate above-average profitability.
C) reveals that the firm's capabilities and resources are aligned with operating practices of
industry participants.
D) raises a company's chances of crafting a sound strategy.
E) raises a company's sustainability dimensions and market characteristics in line with industry
dynamics.

Answer: D
Explanation: Correctly diagnosing an industry's KSFs raises a company's chances of crafting a
sound strategy. The KSFs of an industry point to those things that every firm in the industry
needs to attend to in order to retain customers and weather the competition. If the company's
strategy cannot deliver on the KSFs of its industry, it is unlikely to earn enough profits to remain
a viable business.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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105) Which of the following is particularly pertinent in evaluating whether an industry presents a
sufficiently attractive business opportunity?
A) the industry's growth potential, whether competition appears destined to become stronger or
weaker, and whether the industry's overall profit prospects are above average, average, or below
average
B) an assessment of which firms in the industry have the best and worst competitive strategies,
whether the number of strategic groups in the industry is increasing or decreasing, and whether
economies of scale and experience curve effects are a key success factor
C) whether there are more than five key success factors and more than five barriers to entry
D) constructing a strategic group map and assessing the attractiveness of the competitive position
of each strategic group
E) whether the market leaders enjoy competitive advantages and how hard it is to develop a
strongly differentiated product

Answer: A
Explanation: As a general proposition, the anticipated industry environment is fundamentally
attractive if it presents a company with good opportunity for above-average profitability; the
industry outlook is fundamentally unattractive if a company's profit prospects are unappealingly
low.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-04 How to determine whether an industry's outlook presents a company
with sufficiently attractive opportunities for growth and profitability.
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106) In evaluating whether the industry and competitive environment presents sufficiently
attractive prospects for both competitive success and attractive profits usually does not involve a
consideration of which of the following factors?
A) the industry's growth potential and whether competitive pressures will likely grow stronger or
weaker, and whether strong competitive forces are squeezing industry profitability to subpar
levels
B) whether the company occupies a stronger market position than rivals
C) whether the industry's future profitability will be favorably or unfavorably affected by the
prevailing driving forces
D) the severity of the macro-environment problems confronting the industry
E) whether the industry's product is strongly or weakly differentiated

Answer: E
Explanation: The final step in evaluating the industry and competitive environment is to use the
results of each of the analyses performed to determine whether the industry presents the
company with strong prospects for competitive success and attractive profits. The important
factors on which to base a conclusion include:

• How the company is being impacted by the state of the macro-environment.

• Whether strong competitive forces are squeezing industry profitability to subpar levels.
• Whether the presence of complementors and the possibility of cooperative actions improve the
company's prospects.
• Whether industry profitability will be favorably or unfavorably affected by the prevailing
driving forces.
• Whether the company occupies a stronger market position than rivals.
• Whether this is likely to change in the course of competitive interactions.
• How well the company's strategy delivers on the industry key success factors.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-04 How to determine whether an industry's outlook presents a company
with sufficiently attractive opportunities for growth and profitability.
Bloom's: Understand
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107) When evaluating whether an industry's environment presents a company with an above-
average profitability and an attractive business opportunity, it primarily involves
A) determining the industry's outlook for future profitability.
B) determining which firms in the industry have a competitive advantage and how they got their
advantage.
C) determining the overall strength of the five competitive forces.
D) constructing a strategic group map and assessing the attractiveness of the competitive position
of each strategic group to determine the overall attractiveness of all the strategic groups.
E) using value chain analysis to determine the relative cost positions of rival firms and to learn
who the industry's low-cost producer is.

Answer: A
Explanation: The final step in evaluating the industry and competitive environment is to use the
results of each of the analyses performed to determine whether the industry presents the
company with strong prospects for competitive success and attractive profits. The important
factors on which to base a conclusion include:

• How the company is being impacted by the state of the macro-environment.

• Whether strong competitive forces are squeezing industry profitability to subpar levels.
• Whether the presence of complementors and the possibility of cooperative actions improve the
company's prospects.
• Whether industry profitability will be favorably or unfavorably affected by the prevailing
driving forces.
• Whether the company occupies a stronger market position than rivals.
• Whether this is likely to change in the course of competitive interactions.
• How well the company's strategy delivers on the industry key success factors.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-04 How to determine whether an industry's outlook presents a company
with sufficiently attractive opportunities for growth and profitability.
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108) Which of the following factors should a company consider when determining if an industry
offers good prospects for attractive profits?
A) the industry's growth potential, whether competition appears destined to become stronger or
weaker, how the industry's driving forces might affect overall industry profitability, the
company's competitive position relative to rivals, and the company's proficiency in performing
industry key success factors
B) an assessment of which firms in the industry have the best and worst competitive strategies,
whether the number of strategic groups in the industry is increasing or decreasing, and whether
economies of scale and experience curve effects are a key success factor
C) whether there are more than five key success factors, more than five barriers to entry, and
more than five industry drivers
D) whether the market leaders enjoy competitive advantages and how difficult it is to promote
innovation to develop a strongly differentiated product or service for which a price premium may
be charged
E) constructing a strategic group map and assessing the attractiveness of the competitive position
of each strategic group

Answer: A
Explanation: Factors that need to be determined include: industry prospects for attractive
profits, industry growth potential, power of competitive forces to squeeze industry profitability,
the degree to which prevailing driving forces will impact profitability favorably or unfavorably,
how well a company performs relative to the industry key success factors, and a company's
competitive position in relation to its rivals.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-04 How to determine whether an industry's outlook presents a company
with sufficiently attractive opportunities for growth and profitability.
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109) What are the six key questions that form the framework of thinking strategically about a
company's industry and competitive environment?

Answer: Every company operates in a broad macro-environment that comprises six principal
components: political factors, economic conditions in the firm's general environment (local,
country, regional, worldwide), sociocultural forces, technological factors, environmental factors
(concerning the natural environment), and legal/regulatory conditions. Each of these components
has the potential to affect the firm's more immediate industry and competitive environment,
although some are likely to have a more important effect than others.
Difficulty: 1 Easy
Topic: Understanding a Firm's External Environment
Learning Objective: 03-01 How to recognize the factors in a company's broad macro-
environment that may have strategic significance.
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110) Draw the five forces model of competition and briefly describe the relevance of each of the
five forces in determining the overall strength of competitive pressures a company faces. Which
of the five competitive forces is typically the strongest?

Answer: The five forces framework holds that competitive pressures on companies within an
industry come from five sources. These include (1) competition from rival sellers, (2)
competition from potential new entrants to the industry, (3) competition from producers of
substitute products, (4) supplier bargaining power, and (5) customer bargaining power. The
strongest of the five competitive forces is often the rivalry for buyer patronage among competing
sellers of a product or service.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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111) What are the five competitive forces that comprise the five forces model of competition?

Answer: The five forces framework holds that competitive pressures on companies within an
industry come from five sources. These include (1) competition from rival sellers, (2)
competition from potential new entrants to the industry, (3) competition from producers of
substitute products, (4) supplier bargaining power, and (5) customer bargaining power.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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112) Competitive markets are economic battlefields. True or false? Explain.

Answer: When rivalry is strong, the battle for market share is generally so vigorous that the
profit margins of most industry members are squeezed to bare-bones levels. When rivalry is
moderate, a more normal state, the maneuvering among industry members, while lively and
healthy, still allows most industry members to earn acceptable profits. When rivalry is weak,
most companies in the industry are relatively well satisfied with their sales growth and market
shares and rarely undertake offensives to steal customers away from one another. Weak rivalry
means that there is no downward pressure on industry profitability due to this particular
competitive force.
Difficulty: 1 Easy
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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113) Identify and briefly explain any four of the factors that influence the strength or intensity of
competitive rivalry among an industry's member firms.

Answer: Rivalry among competing sellers increases and becomes a stronger force when:

• Buyer demand is growing slowly.

• Buyers' costs to switch brands are low.
• The products of industry members are commodities or else weakly differentiated.
• The firms in the industry have excess production capacity and/or inventory.
• The firms in the industry have high fixed costs or high storage costs.
• Competitors are numerous or are of roughly equal size and competitive strength.
• Rivals have diverse objectives, strategies, and/or countries of origin.
• Rivals have emotional stakes in the business or face high exit barriers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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114) Identify five factors that tend to intensify competitive rivalry among an industry's member
firms.

Answer: Rivalry among competing sellers increases and becomes a stronger force when:

• Buyer demand is growing slowly.

• Buyers' costs to switch brands are low.
• The products of industry members are commodities or else weakly differentiated.
• The firms in the industry have excess production capacity and/or inventory.
• The firms in the industry have high fixed costs or high storage costs.
• Competitors are numerous or are of roughly equal size and competitive strength.
• Rivals have diverse objectives, strategies, and/or countries of origin.
• Rivals have emotional stakes in the business or face high exit barriers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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115) Identify five factors that tend to weaken the intensity of competitive rivalry among an
industry's member firms.

Answer: Rivalry among competing sellers decreases and becomes a weaker force when:

• Buyer demand is growing quickly.

• Buyers' costs to switch brands are high.
• The products of industry members are not commodities or else strongly differentiated.
• The firms in the industry do not have excess production capacity and/or inventory.
• The firms in the industry have low fixed costs or low storage costs.
• Competitors are few or are of unequal size and competitive strength.
• Rivals have similar objectives, strategies, and/or countries of origin.
• Rivals have few emotional stakes in the business or face low exit barriers.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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116) Identify and briefly describe five common barriers to entering an industry.

Answer: Threat of entry is a stronger force when incumbents are unlikely to make retaliatory
moves against new entrants and entry barriers are low. Entry barriers are high (and threat of
entry is low) when:

• Incumbents have large cost advantages over potential entrants due to: High economies of scale,
Significant experience-based cost advantages or learning curve effects, Other cost advantages
(e.g., favorable access to inputs, technology, location, or low fixed costs).
• Customers have strong brand preferences and/or loyalty to incumbent sellers.
• Patents and other forms of intellectual property protection are in place.
• There are strong network effects.
• Capital requirements are high.
• There is limited new access to distribution channels and shelf space.
• Government policies are restrictive.
• There are restrictive trade policies.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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117) Two friends of yours are considering opening a pizza parlor and delivery service within
walking distance of your campus. They have asked you to help them identify the competitive
pressures stemming from the threat that new firms will enter the pizza segment of the restaurant
industry. What information can you give them?

Answer: Threat of entry is a stronger force when incumbents in the pizza segment of the
restaurant industry are unlikely to make retaliatory moves against new entrants and entry barriers
are low. Entry barriers that tend to deter startups in the pizza segment of the restaurant industry
are high (and threat of entry is low) when:

• Incumbents have large cost advantages over potential entrants due to: High economies of scale,
Significant experience-based cost advantages or learning curve effects, Other cost advantages
(e.g., favorable access to inputs, technology, location, or low fixed costs).
• Customers have strong brand preferences and/or loyalty to incumbent sellers.
• Patents and other forms of intellectual property protection are in place.
• There are strong network effects.
• Capital requirements are high.
• There is limited new access to distribution channels and shelf space.
• Government policies are restrictive.
• There are restrictive trade policies.
Difficulty: 3 Hard
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Apply
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118) Based on your analysis of the ease of entry into the pizza segment of the restaurant industry,
your friends have decided to move forward with their plan to open a pizza parlor and delivery
service within walking distance of your campus. Before they finalize the product mix for their
restaurant, they have asked you to identify the competitive pressures stemming from the threat of
substitutes for the pizza segment of the restaurant industry. What would your report to them
include?

Answer: Companies in an industry or industry segment are vulnerable to competitive pressure

from the actions of companies in a closely adjoining industry, at least whenever buyers view the
products of the two industries or segments as close substitutes. Before assessing the competitive
pressures coming from substitutes, however, company managers must first identify the
substitutes, which is less easy than it sounds since it involves (1) determining where the industry
boundaries lie and (2) figuring out which other products or services can address the same basic
customer needs as those produced by industry members.

For instance, the purveyors of pizza face competitive pressures from other quick-service
restaurants as well as from supermarkets offering prepared foods for take-out, as well as from
do-it-yourselfers who make pizza at home. Three factors determine whether the competitive
pressures from substitute products are strong or weak.

Competitive pressures are stronger when:

1. Good substitutes are readily available and attractively priced—moderate to strong in the pizza
restaurant industry
2. Buyers view the substitutes as comparable or better in terms of quality, performance, and other
relevant attributes—moderate to high, for pizza
3. The costs that buyers incur in switching to the substitutes—low, for pizza.
Taken together, it is apparent that competitive pressures stemming from the threat of substitutes
for pizza are moderate to strong.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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119) Based on your analysis of the ease of entry into and the threat of substitute products and
services in the pizza segment of the restaurant industry, your friends have now asked you to
estimate the threat of retaliation by incumbent rivals in the industry. Explain your assessment of
this threat.

Answer: The expected reaction of industry incumbents in defending against new entry is an
important factor affecting the threat of entry. Retaliation threats are derived from the ability and
willingness of industry incumbents to launch strong defensive maneuvers to maintain their
positions and make it harder for a newcomer to compete successfully and profitably. Entry
candidates may have second thoughts about attempting entry if they conclude that existing firms
will mount well-funded campaigns to hamper (or even defeat) a newcomer's attempt to gain a
market foothold big enough to compete successfully. Such campaigns can include any of the
competitive weapons listed in Table 3.2, such as ramping up advertising expenditures, offering
special price discounts to the very customers a newcomer is seeking to attract, or adding
attractive new product features (to match or beat the newcomer's product offering). Such actions
can raise a newcomer's cost of entry along with the risk of failing, making the prospect of entry
less appealing. The result is that even the expectation on the part of new entrants that industry
incumbents will contest a newcomer's entry may be enough to dissuade entry candidates from
going forward.

However, there are occasions when industry incumbents have nothing in their competitive
arsenal that is formidable enough to either discourage entry or put obstacles in a newcomer's path
that will defeat its strategic efforts to become a viable competitor. In the restaurant industry, for
example, existing restaurants in a given geographic market have few actions they can take to
discourage a new restaurant from opening or to block it from attracting enough patrons to be
profitable.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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120) Identify and briefly explain any two of the factors that influence the strength of competition
from substitute products.

Answer: Competitive pressures from substitutes are stronger when:

• Good substitutes are readily available and attractively priced.

• Substitutes have comparable or better performance features.
• Buyers have low costs in switching to substitutes.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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121) Which factors influence the bargaining strength and leverage of suppliers in the pizza
segment of the restaurant industry?

Answer: Supplier bargaining power is stronger when:

• Suppliers' products and/or services are in short supply—moderate to low for pizza, as raw
materials are commodities, though staff may be in short supply in areas where there are tight
labor markets.
• Suppliers' products and/or services are differentiated—moderate to low for pizza, as raw
materials are undifferentiated commodities.
• Industry members incur high costs in switching their purchases to alternative suppliers
moderate to low for pizza, as there are many suppliers of raw materials and ingredients to make
pizza.
• The supplier industry is more concentrated than the industry it sells to and is dominated by a
few large companies—moderate to low for pizza, as there is little to no concentration among
suppliers
• Industry members do not have the potential to integrate backward in order to self-manufacture
their own inputs—moderate to low for pizza, as raw materials are commodities readily off the
shelf but costly to produce in large quantities.
• Suppliers' products do not account for more than a small fraction of the total costs of the
industry‘s products—moderate to low for pizza, as raw materials are commodities that, with the
possible exception of direct labor, do not account for a substantial fraction of the cost of making
pizza.
• There are no good substitutes for what the suppliers provide—moderate to high for pizza, as
raw materials and ingredients for making pizza such as flour, yeast, cheese, and tomato sauce are
not really substitutable.
• Industry members do not account for a big fraction of suppliers' sales—this is probably true for
pizza.

Supplier bargaining power for pizza is, on balance, moderate to low, with the possible exception
of those pizza parlor operators that are located in tight labor markets that place upward pressure
on staffing costs.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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122) Identify three tools to diagnose the competitive conditions in an industry and explain the
meaning and significance of each of the following and their relationship to one another.

Answer: Three tools to diagnose the competitive conditions in an industry are: (1) driving
forces analysis; (2) strategic group mapping, and (3) analysis of industry key success factors
(KSFs). The most powerful of all industry change agents are called driving forces because they
have the biggest influences and impact in reshaping the industry landscape and altering
competitive conditions. A proven technique for revealing the market positions — both current
and desired — of industry competitors is called strategic group mapping. An industry's KSFs are
those competitive factors that most affect industry members' ability to survive and prosper in the
marketplace. Analysts can use these tools to reveal the particular strategy elements, product
attributes, operational approaches, resources, and competitive capabilities that spell the
difference between being a strong competitor and a weak competitor—and between profit and
loss.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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123) Identify and briefly provide examples of the most common drivers of industry change.

Answer: The most common drivers of change in an industry include (see Table 3.3):

• Changes in the long-term industry growth rate

• Increasing globalization
• Emerging new Internet capabilities and applications
• Shifts in buyer demographics
• Technological change and manufacturing process innovation
• Product and marketing innovation
• Entry or exit of major firms
• Diffusion of technical know-how across companies and countries
• Changes in cost and efficiency
• Reductions in uncertainty and business risk
• Regulatory influences and government policy changes
• Changing societal concerns, attitudes, and lifestyles

Examples include mushrooming use of high-speed Internet service and Voice-over-Internet-

Protocol (VoIP) technology, growing acceptance and profusion of online shopping aided by
rapid delivery using drones, and the exploding popularity of Internet applications ("apps"). The
Internet has given rise to a plethora of online discount stockbrokers, such as E*TRADE, and TD
Ameritrade to mount a strong challenge against full-service firms such as Edward Jones and
Merrill Lynch. The print newspaper/magazine industry has yet to figure out a strategy for
surviving the advent of online news. Profoundly affecting higher education are massive open
online courses (MOOCs), facilitated by organizations such as Coursera, edX, and Udacity.
Finally, the "Internet of things" will feature faster speeds, dazzling applications, and billions of
connected gadgets in the household and the workplace, all performing an array of functions, thus
driving further industry and competitive changes.
Difficulty: 3 Hard
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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124) If some strategic groups are more attractive than others, why do less well-positioned firms
not simply migrate to a more attractive position? Explain and provide an example or two.

Answer: Mobility barriers restrict movement between groups in the same way that entry
barriers prevent easy entry into attractive industries. The most profitable strategic groups may be
protected from entry by high mobility barriers. For instance, Walmart's clientele, merchandise
selection, and pricing points are much too different to justify calling Walmart a close competitor
of Neiman Marcus or Saks Fifth Avenue or for those latter two firms to enter Walmart's
competitive space. For the same reason, the craft beers produced by Yuengling or
Heineken/Lagunitas Brewing Co. cannot realistically compete with the mass-market beers
produced by Pabst or SAB Miller.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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125) Explain why low switching costs and weakly differentiated products tend to give buyers a
high degree of bargaining power.

Answer: Switching costs put a cap on how much industry producers can raise prices or reduce
quality before they will lose the buyer's business. When industry goods are standardized or
differentiation is weak, buyers make their selections on the basis of price, which increases price
competition among vendors.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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126) Where the real payoff from strategic analysis of industry dynamics comes is for managers
to draw some conclusions about what strategy adjustments will be needed to deal with the
impacts of the driving forces. True or false? Explain.

Answer: True. However, taking the right kinds of actions to prepare for the industry and
competitive changes being wrought by the driving forces first requires accurate diagnosis of the
forces driving industry change and the impacts these forces will have on both the industry
environment and the company's business. To the extent that managers are unclear about the
drivers of industry change and their impacts, or if their views are off-base, the chances of making
astute and timely strategy adjustments are slim. So driving-forces analysis is not something to be
undertaken lightly; it has practical value and is basic to the task of thinking strategically about
where the industry is headed and how to prepare for the changes ahead.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Understand
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127) Factors that influence the bargaining strength and leverage of buyers include which
elements?

Answer: Competitive pressures from buyers increase when they have strong bargaining power
and are price sensitive. Buyer bargaining power is stronger when:

• Buyer demand is weak in relation to industry supply.

• The industry's products are standardized or undifferentiated.
• Buyer costs of switching to competing products are low.
• Buyers are large and few in number relative to the number of industry sellers.
• Buyers pose a credible threat of integrating backward into the business of sellers.
• Buyers are well informed about the quality, prices, and costs of sellers.
• Buyers have the ability to postpone purchases.

Buyers are price sensitive and increase competitive pressures when:

• Buyers earn low profits or low income.

• The product represents a significant fraction of their purchases.

Competitive pressures from buyers decrease and become a weaker force under the opposite
conditions.
Difficulty: 1 Easy
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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128) Strong bargaining power on the part of buyers increases or decreases competitive pressure
in what ways?

Answer: Competitive pressures from buyers increase when they have strong bargaining power
and are price sensitive. Competitive pressures from buyers decrease and become a weaker force
under the opposite conditions.

Buyer bargaining power is stronger when:

• Buyer demand is weak in relation to industry supply.

• The industry's products are standardized or undifferentiated.
• Buyer costs of switching to competing products are low.
• Buyers are large and few in number relative to the number of industry sellers.
• Buyers pose a credible threat of integrating backward into the business of sellers.
• Buyers are well informed about the quality, prices, and costs of sellers.
• Buyers have the ability to postpone purchases.

Buyers are price sensitive and increase competitive pressures when:

• Buyers earn low profits or low income.

• The product represents a significant fraction of their purchases.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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129) Assess the bargaining power on the part of buyers of cosmetics.

Answer: Competitive pressures from buyers of cosmetics are low in the following areas where
consumers have weak bargaining power and are not price sensitive, Buyer bargaining power is
weaker when:

• The industry's products are differentiated.

• Buyers are large in population and many in number relative to the number of industry sellers.
• Buyers do not pose a credible threat of integrating backward into the business of sellers.
• Buyers do not have the ability to postpone purchases.

Competitive pressures from buyers of cosmetics are high from customers who are not price
sensitive, thus tending to decrease competitive pressures, which in turn places stronger pressure
on vendors. Buyer power is stronger when

• Except at the very high end where luxury brands are prevalent, cosmetics purchases represent
an insignificant fraction of consumers' budgets for housing, food, or clothing.
• Buyers' costs of switching to competing cosmetic products are low.
• Buyers are well-informed about the quality, prices, and costs of cosmetics manufacturers and
vendors.

On balance, the bargaining power of buyers of cosmetics can be considered to be moderate to

high, except for high-end luxury brands.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
Bloom's: Analyze
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130) What is the Value Net framework? What are the steps in using this framework?

Answer: Like the five forces framework, the Value Net includes an analysis of buyers,
suppliers, and substitutors (as shown in Figure 3.9), but it differs from the five forces framework
in several important ways:

• First, the analysis focuses on the interactions of industry participants with a particular
company. Thus it places that firm in the center of the framework.
• Second, the category of "competitors" is defined to include not only the focal firm's direct
competitors or industry rivals but also the sellers of substitute products and potential entrants.
• Third, the Value Net framework introduces a new category of industry participant that is not
found in the five forces framework—that of "complementors." The inclusion of complementors
draws particular attention to the fact that success in the marketplace need not come at the
expense of other industry participants. Interactions among industry participants may be
cooperative in nature rather than competitive.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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131) For a complete assessment of the driving forces in an industry, three steps are required.
Briefly explain those steps.

Answer: Driving-forces analysis has three steps: (1) identifying what the driving forces are, (2)
assessing whether the drivers of change are, on the whole, acting to make the industry more or
less attractive, and (3) determining what strategy changes are needed to prepare for the impact of
the driving forces.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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132) Identify the five most impactful driving forces in the hospitality and lodging industry and
briefly explain how each one can produce important changes in industry and competitive
conditions.

Answer: Salient drivers of industry change in hospitality and lodging include:

• Emerging new Internet capabilities and applications – impact business travel as

videoconferencing is a substitute for travel to attend meetings, and impact reservation and guest
loyalty program tracking systems
• Shifts in buyer demographics—impact segmentation in the industry by moving from price tiers
(e.g. budget, mid-priced, deluxe priced) to service tiers (e.g. limited service, full-service,
extended stay, green hotels, boutiques, luxury brands)
• Changes in cost and efficiency—impair or propel the industry to move from price tiers (e.g.,
budget, mid-priced, deluxe priced) to service tiers (e.g., limited service, full-service, extended
stay, boutiques, luxury brands)
• Increasing globalization—proliferation of global brands (Accor International, Best Western,
Choice, Hilton, Marriott, IC Group, etc.) assuring travelers of the same experiences at disparate
destinations worldwide
• Regulatory influences and government policy changes—impact permits and tax incentives (or
disincentives) for construction and/or retrofit of new properties; reimbursement rates for
business, government and armed forces personnel, etc.

Caveat: getting a handle on the collective impact of the driving forces in hospitality and lodging
requires looking at the likely effects of each factor separately, since the driving forces may not
all be pushing change in the same direction. For example, one driving force may be acting to
spur demand for the industry's product while another is working to curtail demand. Whether the
net effect on industry demand is up or down hinges on which change driver is deemed by an
analyst to be the most powerful.
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-02 How to use analytic tools to diagnose the competitive conditions in a
company's industry.
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133) Your study group has been charged with conducting an assessment of competitive behavior
in the sporting apparel industry. What are likely to be the key elements of your analysis?

Answer: Gathering competitive intelligence about the strategic direction and likely moves of
key competitors allows a company to prepare defensive countermoves, to craft its own strategic
moves with some confidence about what market maneuvers to expect from rivals in response,
and to exploit any openings that arise from competitors' missteps. Based on a framework from
Michael Porter, in order to succeed in predicting a competitor's next moves, company strategists
need to assess:

• Strategy: Analysts need to begin with a good understanding of each rival's—in this instance,
Nike, Under Armour, lululemon, Adidas-Reebok, Fila, etc.—current strategy, as an indicator of
its pattern of behavior and best strategic options.
• Objectives: An appraisal of a rival's objectives should include not only its financial
performance objectives but strategic ones as well (such as those concerning market share). What
is even more important is to consider the extent to which the rival is meeting these objectives and
whether it is under pressure to improve.
• Resources and Capabilities: A rival's strategic moves and countermoves are both enabled and
constrained by the set of resources and capabilities the rival has at hand. Thus a rival's resources
and capabilities (and efforts to acquire new resources and capabilities) serve as a strong signal of
future strategic actions (and reactions to your company's moves)
• Assumptions: How a rival's top managers think about their strategic situation can have a big
impact on how the rival behaves. Banks that believe they are too big to fail, for example, may
take on more risk than is financially prudent. Assessing a rival's assumptions entails considering
its assumptions about itself as well as about the industry it participates in.

The question is where to look for such information, since rivals rarely reveal their strategic
intentions openly. Information regarding these four analytic components can often be gleaned
from company press releases, information posted on the company's website (especially the
presentations management has recently made to securities analysts), and such public documents
as annual reports and 10-K filings for those sporting apparel companies that are publicly-traded).
Difficulty: 2 Medium
Topic: Competitive Behavior
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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134) What is the value of using Michael Porter's Framework for Competitor Analysis to observe
competitors and trying to predict what moves they will make next?

Answer: Unless a company pays attention to the strategies and situations of competitors and has
some inkling of what moves they will be making, it ends up flying blind into competitive battle.
As in sports, scouting the opposition is an essential part of game plan development. Gathering
competitive intelligence about the strategic direction and likely moves of key competitors allows
a company to prepare defensive countermoves, to craft its own strategic moves with some
confidence about what market maneuvers to expect from rivals in response, and to exploit any
openings that arise from competitors' missteps. Michael Porter's Framework for Competitor
Analysis points to four indicators of a rival's likely strategic moves and countermoves. These
include a rival's current strategy, objectives, resources and capabilities, and assumptions about
itself and the industry. Doing the necessary detective work can be time-consuming, but scouting
competitors well enough to anticipate their next moves allows managers to prepare effective
countermoves (perhaps even beat a rival to the punch) and to take rivals' probable actions into
account in crafting their own best course of action.
Difficulty: 3 Hard
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Understand
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135) What are an industry's key success factors (KSFs)? How would you assess those factors for
the beer industry?

Answer: KSFs by their very nature are so important to competitive success that all firms in the
industry must pay close attention to them or risk becoming an industry laggard or failure. To
indicate the significance of KSFs another way, how well the elements of a company's strategy
measure up against an industry's KSFs determines whether the company can meet the basic
criteria for surviving and thriving in the industry. Identifying KSFs, in light of the prevailing and
anticipated industry and competitive conditions, is therefore always a top priority in analytic and
strategy-making considerations. Company strategists need to understand the industry landscape
well enough to separate the factors most important to competitive success from those that are
less important.

In the beer industry, for example, although there are many types of buyers (wholesale, retail, end
consumer), it is most important to understand the preferences and buying behavior of the beer
drinkers. Their purchase decisions are driven by price, taste, convenient access, and marketing.
Thus the KSFs include a strong network of wholesale distributors (to get the company's brand
stocked and favorably displayed in retail outlets, bars, restaurants, and stadiums, where beer is
sold) and clever advertising (to induce beer drinkers to buy the company's brand and thereby pull
beer sales through the established wholesale and retail channels). Because there is a potential for
strong buyer power on the part of large distributors and retail chains, competitive success
depends on some mechanism to offset that power, of which advertising (to create demand pull) is
one. Thus the KSFs also include superior product differentiation (as in craft beers and
microbrews) or superior firm size and branding capabilities (as in national brands). The KSFs
also include full utilization of brewing capacity (to keep manufacturing costs low and offset the
high costs of advertising, branding, and product differentiation).
Difficulty: 3 Hard
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Analyze
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136) Identify four factors that affect whether an industry does or does not present a company
with a good business opportunity.

Answer: An industry's key success factors are those competitive factors that most affect
industry members' ability to survive and prosper in the marketplace: the particular strategy
elements, product attributes, operational approaches, resources, and competitive capabilities that
spell the difference between being a strong competitor and a weak competitor—and between
profit and loss.
Difficulty: 2 Medium
Topic: Analyzing Industry Competition
Learning Objective: 03-03 How to map the market positions of key groups of industry rivals.
Bloom's: Remember
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137) Can an industry be attractive to one company and unattractive to another company? Why or
why not?

Answer: It is a mistake to think of a particular industry as being equally attractive or

unattractive to all industry participants and all potential entrants. Attractiveness is relative, not
absolute, and conclusions one way or the other have to be drawn from the perspective of a
particular company. For instance, a favorably positioned competitor may see ample opportunity
to capitalize on the vulnerabilities of weaker rivals even though industry conditions are otherwise
somewhat dismal. At the same time, industries attractive to insiders may be unattractive to
outsiders because of the difficulty of challenging current market leaders or because they have
more attractive opportunities elsewhere.
Difficulty: 2 Medium
Topic: Five Forces Model of Industry Attractiveness
Learning Objective: 03-04 How to determine whether an industry's outlook presents a company
with sufficiently attractive opportunities for growth and profitability.
Bloom's: Understand
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