Chapter 2 Strategy Analysis

Question 1

When it comes to ______ ANALYSIS, a firm’s profit potential is determined by its own strategic choices:

1) Industry choice
2) Competitive positioning (within each industry)
3) Corporate strategy (across industries)

Answer 1

STRATEGY

Question 2

Strategy analysis involves what 3 types of analysis?

Answer 2

• industry analysis
• competitive strategy analysis
• corporate strategy analysis

Question 3

What are Porter’s 5 Forces?

(The average profitability of an industry is influenced by the “five forces”)

Answer 3

1) Rivalry among existing firms ↓
2) Threat of new entrants ↓
3) Threats of substitute products ↓
4) Bargaining power of buyers ↓

Bargaining power of suppliers ↓

Question 4

What determines RIVALRY among existing firms?

Answer 4

• Industry growth rate ↓
• The number of competitors ↑
• Degree of differentiation and switching costs↓
• Economies of scale ↑

Question 5

What determines the bargaining power of buyers?

Answer 5

• Buyers’ switching costs ↓
• Differentiation ↓
• Number of buyers ↓

Volume per buyer ↑

Question 6

What determines threat of new entrants?

Answer 6

• Economies of scale ↓
• First mover advantage ↓
• Limited access to channels of distribution ↓
• Legal barriers ↓

Question 7

What determines threat of substitute products?

Answer 7

• Substitute products’ price ↓
• Buyers’ willingness to switch ↑

Question 8

What are 2 basic competitive strategies?

Answer 8

oCost leadership

oProduct/service differentiation

Question 9

•What determines the bargaining power of suppliers?

Answer 9

• Suppliers’ switching costs ↓
• Degree of differentiation in supplies ↑
• Number of suppliers ↓

Question 10

To achieve competitive advantage, the firm has to have the capabilities needed to implement and sustain the chosen strategy

Answer 10

• Acquire core competencies (economic assets)
• Structure value chain appropriately

Core competencies are the economic assets that the firm possesses, whereas the value chain is
the set of activities that the firm performs to convert inputs into outputs.

Question 11

PRACTICE QUIZ

1. Which of the following accounting equations is correct?

• Profit = Revenues + Expense
• Ending Retained Earnings = Beginning Retained Earnings + Net Income for the period – Dividends for the period THIS IS THE STATEMENT OF RETAINED EARNINGS
• (Shareholders’) Equity = Liabilities + Assets
• Shareholders’ Equity = Contributed Capital – Retained Earnings
• Net Income = Sales + Cost of Goods Sold

Answer 11

Ending Retained Earnings = Beginning Retained Earnings + Net Income for the period – Dividends for the period THIS IS THE STATEMENT OF RETAINED EARNINGS

Question 12

PRACTICE QUIZ

1. Which of the following is NOT a type of asset?

• Prepaid expenses
• Inventory
• Short-term investment
• Accounts receivable
• Accounts payable

Answer 12

accounts payable

Question 13

Practice Quiz

Which of the following is reported as cash inflow (i.e., positive cash flow) in the statement of cash flows?

• Increase in accounts receivable
• Payments for property and equipment
• Increase in inventories
• Dividends paid
• Increase in accounts payable

Answer 13

• Increase in accounts payable

Question 14

If a supplier reduces its accounts receivable, that would cause its cash flow to _____.

think of it as reducing the amount of money we are waiting to be paid on, increases cash flow

Answer 14

increase

Question 15

An _____ in accounts payable is an increase in cash flow.

(think of it as holding on to money that should be used to pay suppliers, but instead you hold on to it; therefore, you increase your cash flow)

Answer 15

increase

Question 16

Which of the following is an INCORRECT statement?

• When an industry is growing very rapidly, incumbent firms tend to engage in aggressive price competition to take away market share from the other players
• An incumbent firm’s first mover advantage can deter potential entrants in an industry
• When there are entry barriers, competition in an industry is likely to be higher
• When there are economies of scale, companies tend to engage in aggressive competition for market share
• When switching costs are low, there is a greater incentive for firms to engage in price competition

Answer 16

When an industry is growing very rapidly, incumbent firms tend to engage in aggressive price competition to take away market share from the other players