Pepperdine University

FINC 655

Chapter 10

Multiple Choice Questions

1)An industry is defined as

1. 1. a group of firms producing the exact same products and services. [the products are not necessarily exactly the same]
   2. firms producing items that sell through the same distribution channels. [products within an industry may be sold through different distribution channels]
   3. firms that have the same resources and capabilities. [firms within an industry may have different resources and capabilities]
   4. a group of firms producing products that are close substitutes. []

2. Attractive industries have all the following, except
   1. high supplier power [; high supplier power would allow suppliers to capture more of the industry value]
   2. low buyer power [low buyer power is positive for an industry; it means buyers capture less value]
   3. high entry barriers [high entry barriers help protect the industry from the threat of potential entrants]
   4. low rivalry [low rivalry is positive for an industry; firms do not compete as aggressively]

3. Which of the following is NOT an example of an entry barrier?
   1. Government protection through patents or licensing requirements [patents and licensing do slow entry into an industry]
   2. Strong brands [brands help deter entry because potential entrants will have to invest capital and time to build a competing brand]
   3. Low capital requirements for entry [; if capital requirements are low, it will be less costly (easier) to enter]
   4. Lower costs driven by economies of scale [this is an entry barrier as potential entrants know they will not be cost- competitive unless they can achieve scale]

4. Buyers have higher power when
   1. their suppliers sell a highly differentiated product. [highly differentiated products mean buyers have lower power because it is more costly to switch to a rival product]
   2. they are not a significant purchaser of their supplier's output. [purchasing a large volume of a particular supplier’s output leads to higher negotiating power]
   3. switching costs are low. [; low switching costs put buyers in a better negotiating position because it is easier to buy a rival’s product]
   4. the buyer industry is highly fragmented (buyers are not concentrated) [fragmented buyers do not have more negotiating power].

5. Which of the following is NOT a factor that contributes to higher rivalry in an industry? 2

1. 1. Numerous competitors. [more competitors generally leads to greater rivalry as cooperative outcomes are hard to achieve with many competitors]
   2. High fixed costs. [high fixed costs are associated with higher rivalry; when fixed costs are high and marginal costs are low, there is pressure to cut price to build volume in order to make some contribution to covering fixed costs]
   3. Fast industry growth. [; high growth reduces rivalry because firms are less worried about fighting over existing sources of demand given that demand is growing]
   4. Low switching costs for buyers. [low switching costs means firms have a high incentive to compete for buyers to get them to switch]

6. The concept that describes firms possessing different bundles of resources is
   1. resource heterogeneity []
   2. resource immobility [resource immobility describes the fact that resources resist transfer or copying]
   3. barriers to entry [barriers to entry are factors that reduce threat of entry to an industry]
   4. imitability [imitability refers to whether a resource can be copied]

7. If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its products should
   1. increase [increased elasticity means buyers would be more price sensitive; if the product is successfully differentiated, buyers should become less price sensitive]
   2. decrease [; decreased elasticity means buyers would be less price sensitive. If the product is more differentiated, buyers should be less price sensitive.]
   3. become marginal [marginal is not a term used to describe demand elasticity]
   4. be unaffected [elasticity should be affected]

8. When a resource or capability is valuable and rare, a firm may gain a
   1. sustainable competitive advantage. [the resource or capability must also be difficult to imitate / substitute for the competitive advantage to be sustainable]
   2. competitive parity. [a valuable and rare resource or capability should help the firm do better than just achieve parity]
   3. cost advantage. [not necessarily; the advantage might be related to differentiation]
   4. temporary competitive advantage. [; valuable and rare resources lead to a temporary competitive advantage]

9. Which of the following is critical for a firm adopting a long-term cost-reduction strategy?
   1. The firm must also differentiate its product or service. [the firm does not necessarily have to differentiate too]
   2. The strategy reduces costs by at least 10%. [a cost advantage of less than 10% is still meaningful]
   3. The strategy is focused on reducing internal production costs. [the strategy could be focused on some other type of cost and still be successful]
   4. The methods of achieving cost reductions are difficult to imitate. [; for the advantage to be sustainable, it must be difficult for rivals to imitate]