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Questions and Answers
After completing a thorough industry analysis, which of the following is most likely an additional element an analyst should examine when analyzing a specific company within the industry?
After completing a thorough industry analysis, which of the following is most likely an additional element an analyst should examine when analyzing a specific company within the industry?
- Competitive strategy. (correct)
- Threat of entry.
- Power of buyers.
Adrian Martin, CFA, is tasked with evaluating profitability for a mature industry in the textile space. Given that the industry consists entirely of publicly traded companies, the best measure for her to use is:
Adrian Martin, CFA, is tasked with evaluating profitability for a mature industry in the textile space. Given that the industry consists entirely of publicly traded companies, the best measure for her to use is:
- return on equity.
- gross profit margin.
- return on invested capital. (correct)
If an investor is looking for exposure to more industry-specific risk and less company-specific risk, a financial advisor is most likely to recommend which of the following approaches?
If an investor is looking for exposure to more industry-specific risk and less company-specific risk, a financial advisor is most likely to recommend which of the following approaches?
- Smaller investments in several companies within a targeted industry. (correct)
- Larger investments in fewer companies within a targeted industry.
- Smaller investments in fewer companies across many industries.
Which of the following types of industries is typically characterized by above-normal expansion in sales and profits independent of the business cycle?
Which of the following types of industries is typically characterized by above-normal expansion in sales and profits independent of the business cycle?
An industry has a Herfindahl-Hirschman Index (HHI) of 2,740. An implication of this measure is that the industry will most likely have:
An industry has a Herfindahl-Hirschman Index (HHI) of 2,740. An implication of this measure is that the industry will most likely have:
Which of the following statements is most accurate regarding a firm that chooses to employ a focus-based competitive strategy?
Which of the following statements is most accurate regarding a firm that chooses to employ a focus-based competitive strategy?
Which of the following competitive strategies lends itself most to industries where product offerings are relatively stable and the rate of innovation is slow?
Which of the following competitive strategies lends itself most to industries where product offerings are relatively stable and the rate of innovation is slow?
How would a commercial industry classification system provider classify a firm with two business lines, with one line representing 65% of its total revenue and the other representing 35%?
How would a commercial industry classification system provider classify a firm with two business lines, with one line representing 65% of its total revenue and the other representing 35%?
An analyst is using the Herfindahl-Hirschman Index (HHI) to evaluate industry concentration. The industry has four firms with the following market shares: 45%, 25%, 20%, and 10%. This industry's concentration will be considered:
An analyst is using the Herfindahl-Hirschman Index (HHI) to evaluate industry concentration. The industry has four firms with the following market shares: 45%, 25%, 20%, and 10%. This industry's concentration will be considered:
If a company shows relatively stable demand for its services through natural fluctuations in the overall economy, the company will be considered a:
If a company shows relatively stable demand for its services through natural fluctuations in the overall economy, the company will be considered a:
An analyst is reviewing an industry and its associated barriers to entry and bargaining power of suppliers. This assessment of industry profitability and competitiveness is a part of which step of the industry and competitive analysis process?
An analyst is reviewing an industry and its associated barriers to entry and bargaining power of suppliers. This assessment of industry profitability and competitiveness is a part of which step of the industry and competitive analysis process?
In differentiating between an industry and a sector, an analyst may describe transportation and airlines in what manner?
In differentiating between an industry and a sector, an analyst may describe transportation and airlines in what manner?
The competitive forces identified by Michael Porter include:
The competitive forces identified by Michael Porter include:
Which of the following barriers to entry will increase the competitiveness of the companies within an industry?
Which of the following barriers to entry will increase the competitiveness of the companies within an industry?
Which of the following types of industries is typically characterized by stable performance during both expansions and contractions of the business cycle?
Which of the following types of industries is typically characterized by stable performance during both expansions and contractions of the business cycle?
A firm that pursues a differentiation strategy is most likely to emphasize:
A firm that pursues a differentiation strategy is most likely to emphasize:
Commercial index providers typically classify companies by:
Commercial index providers typically classify companies by:
Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their:
Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their:
An analyst studying the defense industry will focus on political influences in a PESTLE analysis for which of the following reasons?
An analyst studying the defense industry will focus on political influences in a PESTLE analysis for which of the following reasons?
An analyst develops a style box that categorizes industries based on growth rate and sensitivity to economic business cycles. Which of the following industries will most likely land in the box for (higher) growth and defensive sensitivity to cycles?
An analyst develops a style box that categorizes industries based on growth rate and sensitivity to economic business cycles. Which of the following industries will most likely land in the box for (higher) growth and defensive sensitivity to cycles?
The threat of substitutes is most likely to be low for a firm that:
The threat of substitutes is most likely to be low for a firm that:
Industry analysis is most likely to provide an analyst with insight about a company's:
Industry analysis is most likely to provide an analyst with insight about a company's:
An aggressive price reduction to gain market share is most likely to be associated with a:
An aggressive price reduction to gain market share is most likely to be associated with a:
In conducting a PESTLE analysis of external factors impacting an industry, an analyst will examine economic influences focused on trends in which types of structural measures?
In conducting a PESTLE analysis of external factors impacting an industry, an analyst will examine economic influences focused on trends in which types of structural measures?
Company X runs a series of high-end hotels in the Northeastern United States. The average room rate per night is higher than any other hotel in the region. Which of the following best allows the company to build upon its differentiation strategy?
Company X runs a series of high-end hotels in the Northeastern United States. The average room rate per night is higher than any other hotel in the region. Which of the following best allows the company to build upon its differentiation strategy?
Economic profits are most likely to be earned by firms in an industry that is characterized by:
Economic profits are most likely to be earned by firms in an industry that is characterized by:
Food, beverage, and utility companies are examples of:
Food, beverage, and utility companies are examples of:
A commercial industry classification system has a hierarchical structure: economic sectors, business sectors, industry groups, industries, and activities. Which of the following classifications does this represent?
A commercial industry classification system has a hierarchical structure: economic sectors, business sectors, industry groups, industries, and activities. Which of the following classifications does this represent?
Regarding competitive strategy and Porter's Five Forces, the bargaining power of customers can be overcome by successfully implementing which type of strategy?
Regarding competitive strategy and Porter's Five Forces, the bargaining power of customers can be overcome by successfully implementing which type of strategy?
Factors that increase competition in an industry most likely include:
Factors that increase competition in an industry most likely include:
An analyst studying an industry notices that the rivalries among the companies in the industry are fairly significant. Which of the following characteristics of the industry supports the analyst's assessment?
An analyst studying an industry notices that the rivalries among the companies in the industry are fairly significant. Which of the following characteristics of the industry supports the analyst's assessment?
In an industry and competitive analysis, the industry base rate is best described as the:
In an industry and competitive analysis, the industry base rate is best described as the:
As part of an industry and competitive analysis, an analyst first defines and then surveys an industry. Which of the following assessments will be made as part of the survey step?
As part of an industry and competitive analysis, an analyst first defines and then surveys an industry. Which of the following assessments will be made as part of the survey step?
Flashcards
Competitive Strategy
Competitive Strategy
A company's strategy for competing in the market.
Return on Invested Capital
Return on Invested Capital
Measures return after taxes on total invested capital.
Industry-Specific Risk Strategy
Industry-Specific Risk Strategy
Smaller investments in several companies within a targeted industry
Growth Industry
Growth Industry
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High HHI Implication
High HHI Implication
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Focus (Niche) Strategy
Focus (Niche) Strategy
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Cost Leadership Strategy
Cost Leadership Strategy
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Classifying Firms with Multiple Business Lines
Classifying Firms with Multiple Business Lines
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High Industry Concentration
High Industry Concentration
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Defensive Company
Defensive Company
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Analyze Industry Structure
Analyze Industry Structure
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Sector vs. Industry
Sector vs. Industry
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Porter's Five Forces
Porter's Five Forces
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Barriers to Entry
Barriers to Entry
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Defensive Industry
Defensive Industry
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Differentiation Strategy Focus
Differentiation Strategy Focus
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Commercial Index Providers
Commercial Index Providers
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Defense Industry PESTLE Focus
Defense Industry PESTLE Focus
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Biotechnology
Biotechnology
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Low Threat of Substitutes
Low Threat of Substitutes
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Study Notes
Industry Analysis: Additional Elements
- Post industry analysis, analysts should examine the specific company's competitive strategy.
- Company analysis includes financial condition, services, and competitive strategy which can include cost leadership or differentiation.
Profitability Evaluation: Mature Industries
- Return on invested capital is the best measure when evaluating profitability for a mature industry in the textile space.
- Return on invested capital measures return after taxes on a base of invested capital (debt and equity).
- Return on invested capital accounts for total capital structure
- Gross profit margin (sales less cost of goods sold divided by sales), does not assess total profitability because there are myriad other costs beyond just cost of goods sold.
Investment Strategy: Risk Exposure
- To gain exposure to industry-specific risk while reducing company-specific risk, financial advisors suggest smaller investments in numerous companies within a targeted industry.
Industry Types: Growth
- Growth industries are characterized by above-normal expansion in sales and profits, which operate independently of the business cycle.
Herfindahl-Hirschman Index (HHI): Industry Concentration
- HHI measures industry concentration.
- An industry with an HHI of 2,740 indicates a highly concentrated market, which implies greater profitability, pricing power and less competitive intensity.
- An HHI above 2,500 is considered highly concentrated.
Competitive Strategy: Focus-Based Approach
- Focus strategy (or niche) is a hybrid of cost leadership and differentiation.
- Focus strategies target narrower customer ranges, unlike differentiation strategies appealing to customers willing to pay more for perceived value.
Competitive Strategies: Stable Product Offerings
- Cost leadership is best in industries with stable product offerings and slow innovation, focusing on profits via low prices and costs.
Industry Classification: Commercial Systems
- A firm with two business lines (65% and 35% of revenue) is classified under the line representing >60% of its revenue.
Industry Concentration: HHI Evaluation
- High industry concentration is indicated by an HHI greater than 2,500.
- To calculate HHI: sum of the squares of each market share [(45 x 45) + (25 × 25) + (20 × 20) + (10 × 10) = 3,150].
Company Demand: Defensive
- A defensive company exhibits stable demand, regardless of economic fluctuations.
Industry Analysis: Competitive Analysis Process
- Analyzing industry structure involves assessing industry profitability and competitiveness.
- Porter's Five Forces (barriers to entry and bargaining power) are used to assess competitiveness and profitability for industry analysis.
- Defining and surveying the industry are preliminary steps in the analysis process.
Sector vs. Industry: Definition
- A sector is a grouping of similar industries.
- An industry is defined by the products it produces and services it provides.
- e.g., Transportation is a sector, while airlines are an industry.
Porter's Five Forces: Components
- Porter's five competitive forces: rivalry among existing competitors, threat of entry, threat of substitutes, power of buyers, and power of suppliers.
Barriers to Entry: Impact on Competitiveness
- Significant regulatory costs and pre-existing customer loyalties increase competitiveness for companies within an industry.
- Low up-front capital requirements increases industry competition.
Industry Performance: Defensive
- Defensive industries are characterized by stable performance during expansions and contractions of the business cycle.
Differentiation Strategy: Emphasis
- Market research is emphasized in differentiation strategies to identify the needs for which customer is willing to pay a premium.
Commercial Index Providers
- Standard and Poor's and MSCI Barra classify companies by principal business activity.
Industry Classification: GICS
- GICS classifies firms by principal business activity such as consumer staples, financial services, or health care.
PESTLE Analysis: Defense Industry
- In a PESTLE analysis for the defense industry, political influences are emphasized because governments are typically the primary buyers.
Industry Style Box: Growth and Sensitivity
- Industries with high growth and defensive sensitivity to cycles are most likely biotechnology.
- Industries with mature and defensive sensitivity to cycles are most likely utilities.
- Industries with mature and cyclical sensitivity to cycles are most likely crude oil production.
Threat of Substitutes: Low Conditions
- A low threat of substitutes is associated with a firm that produces a differentiated product with high switching costs.
Industry Analysis: Insight Provision
- Industry analysis gives insight into a company's pricing power.
Market Share: Gaining Through Price
- Cost leadership strategy is most likely to implement an aggressive price reduction to gain market share.
- Differentiation strategies seek to gain a price premium for its products by making them distinctive to the consumer.
PESTLE Analysis: Economic Factors
- When conducting a PESTLE analysis, economic influences are examined as they relate to patterns in structural measures that include unemployment and labor force numbers.
Differentiation Strategy: Company X
- Strong customer experience enables a high-end hotel to build upon its differentiation strategy.
- Differentiation strategy is when customers see value in paying more for a product or service
Economic Profits: Industry Characteristics
- High barriers to entry and low power of buyers result in the earning of economic profits by firms in an industry.
Industry Examples: Defensive
- Food, beverage, and utility companies are defensive industries, which provide basic necessities.
Commercial Classification Systems: Hierarchical Structure
- Refinitiv Business Classification (TRBC) represents a classification system that has a hierarchical structure: economic sectors, business sectors, industry groups, industries, and activities
Competitive Strategy: Porter's Five Forces
- Cost leadership, differentiation, and focus enables a firm to overcome the customers' bargaining power.
- Cost leadership firms benefit, because customers are not able to drive down prices, differentiation firms/focus firms are able to prevent switching and shopping around.
Industry Competition
- Competition in an industry is increased by low barriers to entry, low concentration, and high unused capacity, and fragmented industries
Significant Rivalries: Industry Assessment
- High exit costs relative to staying in supports the assessment of significant rivalry in the industry.
Industry Analysis: Base Rate
- In an industry and competitive analysis, the industry base rate is the overall baseline profitability for the industry as a whole.
Industry Survey: Components
- Assessments of the survey step include industry growth rate over the several years.
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