Questions and Answers
Factors that increase competition in an industry most likely include:
Which of the following statements is most accurate regarding a firm that chooses to employ a focus-based competitive strategy?
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:
Regarding competitive strategy and Porter's Five Forces, the bargaining power of customers can be overcome by successfully implementing which type of strategy?
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Which of the following competitive strategies lends itself most to industries where product offerings are relatively stable and the rate of innovation is slow?
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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:
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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?
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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?
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An industry has a Herfindahl-Hirschman Index (HHI) of 2,740. An implication of this measure is that the industry will most likely have:
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Study Notes
Competition Factors in Industries
- Low barriers to entry enable more firms to enter the market, increasing competition.
- High unused capacity combined with low concentration leads to intense competition as firms seek to maximize market share.
Focus-Based Competitive Strategy
- A focus strategy is often hybrid, incorporating elements of both cost leadership and differentiation.
- Target audience for a focus strategy is narrower, not a wide range of customers.
- Customers willing to pay more for perceived value are more aligned with differentiation.
Herfindahl-Hirschman Index (HHI)
- HHI is calculated by squaring the market shares of firms and summing them up.
- An HHI of 3,150 indicates high industry concentration, suggesting more competitive power within the market.
- Industries with HHI > 2,500 are considered highly concentrated, while HHI < 1,500 indicate low concentration.
Bargaining Power of Customers
- To overcome customers' bargaining power, firms can implement all three strategies: cost leadership, differentiation, and focus.
- Cost leadership minimizes the ability of customers to drive down prices below marginal costs.
- Differentiation and focus allow firms to cater effectively to customers, reducing their inclination to switch suppliers.
Cost Leadership Strategy
- Best suited for industries with stable product offerings and slow innovation rates.
- Focuses on achieving profitability through lower sales prices and production costs.
Profitability Measures for Mature Industries
- Return on invested capital (ROIC) is the best profitability measure for mature industries, accounting for total capital structure.
- Return on equity (ROE) only considers equity capital, while gross profit margin does not capture total profitability.
Industry Style Box Categorization
- Biotechnology falls into the higher growth and defensive sensitivity category to economic cycles.
- Utilities are categorized as mature and defensive, while crude oil production is mature and cyclical.
Industry Classification Systems
- Refinitiv Business Classification (TRBC) features a hierarchical structure including economic sectors and specific activities.
- Industry Classification Benchmark (ICB) organizes industries into supersectors and subsectors, while Global Industry Classification Standard (GICS) structures them into sectors and subindustries.
Implications of HHI on Industry Performance
- An industry with an HHI of 2,740 is likely to exhibit greater profitability due to high concentration.
- High HHI suggests greater pricing power and reduced competitive intensity within the industry.
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Description
This quiz explores the key factors that influence competition within industries. It focuses on concepts such as barriers to entry, market concentration, and unused capacity, which can affect how many firms can effectively compete. Test your understanding of these important economic principles!
