CFA 2018 Quest bank 02 Reading 30 to 32 Strategy

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Test ID: 7440700

Reading 30 to 32 Strategy

Question #1 of 73

Question ID: 462984

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Question #2 of 73

Question ID: 463002

Question #3 of 73

Question ID: 462994

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Which of the following are likely to result in higher profitability for a firm in a competitive industry? High barriers to entry, low barriers to exit, and high switching costs.

Product differentiation, low switching costs, and high barriers to exit.

Low supplier concentration, low buyer concentration, and commoditization of the industry's products.

Explanation

All else equal, high barriers to entry, low barriers to exit, and high switching costs will tend to result in higher profitability for a firm in a competitive industry.

The choiceof competitivestrategyisdriven bytwofundamental questions.Thesefundamental questionsinvolve:

industry attractiveness and competitive advantage.

industryattractivenessand profitability.

competitiveadvantageandindustrygrowth.

Explanation

Accordingto Porter,thetwo key questionsindetermininga competitivestrategyinvolveindustryattractivenessand competitive advantage.

Strawline, Inc. manufactures straws using a new technology which allows straws to be made with an 11% reduction in costs. According to Porter's model, which of the following is most likely?

Strawline's increased profit margins will allow it to decrease financial leverage. Any initial advantage will eventually be eliminated as competitors adopt the same technology.

Strawline's increased profit margins will allow it to increase financial leverage.

Explanation

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Question #4 of 73

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Question #5 of 73

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Question #6 of 73

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Question #7 of 73

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An industry that manufactures and sells a commodity-like product will face increased competition primarily because of greater:

threat of new entrants. bargaining power of buyers. threat of substitute products.

Explanation

Substitute products limit the profit potential of an industry. Why? They limit the prices firms can charge. There will be higher levels of competition and lower profit margins for more commodity-like products.

Automation can help a firm improve its competitive position by affecting:

new entrants to the industry. suppliers' bargaining power. the threat of substitutes.

Explanation

Automating production can make it more expensive for rivals to enter the market, increasing the width of a company's economic moat. Automation on its own will not affect the threat of substitutes or increase suppliers' bargaining power.

Short-term profitability is determined by:

supply and demand. bargaining power. industry structure.

Explanation

Supply and demand determines short-term profitability.

Karla Hanover, CEO of Marshall Computers, is gloating during a board meeting. "It's been a wonderful year, people. First, we received a tax break from the state that allows us to reduce our manufacturing costs. Second, we drove our longtime

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Question #8 of 73

Question ID: 462982

Question #9 of 73

Question ID: 462969

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ᅞ B) ᅚ C)

The new, faster processor. The tax break.

The demise of a competitor.

Explanation

Government action and technological advancements don't generally have a lasting effect on an industry. However, such company-specific factors as a state tax break and a patented new technology can strengthen one company attheexpense of others.However,theelimination of a rival couldresultin new competitorsenteringthe market.Assuch,itis least likely to provide a lasting competitive advantage.

While Joseph Donovan,CFA, wasinterviewing GeneHickman,theCEO ofHickman Supply,Hickman madethefollowing comments on the auto supply industry:

1. Auto manufacturers arerelying on Tier1suppliersfor more and moresub-assembly work and quality control andtesting. 2. The additional subassembly work facilitatesspecialization amongsuppliers and allowsthem to resell theirexpertiseto

other auto manufacturers.

3. The additional subassembly work requires additional capital investment andrisk taking by thesuppliers.

Given thesestatements,Donovan ismost likelyto concludethat barriersto entry to the auto supply industry haveincreased dueto:

Statements 1 and 3 only. Statements1 and2 only. Statements2 and3 only.

Explanation

Based on the Porter model,increasedspecialization and an increasein capital investment may each actto increase barriersto entry.Thefactthat auto manufacturers arerelying more and more on theirsuppliers may beinterpreted as an industry dynamic that would attract more competition..

Which ofthefollowingstatements about Porter'sfivefactorsisleast accurate?

Rivalry increases when many firms of relatively equal size compete within an industry.

The presence ofsubstitute products limitsthe profit potential of an industry. Profitability isenhanced by increasesin the bargaining power of buyers orsuppliers within an industry.

Explanation

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Question #10 of 73

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Question #11 of 73

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Question #12 of 73

Question ID:472535

Question #13 of 73

Question ID:463009

Accordingto Porter's Five Forces, all ofthefollowingshould be considered when analyzing a firm's competitivestrategy EXCEPT:

rivalry among existing suppliers. bargaining power ofsuppliers. entry barriers.

Explanation

Therivalry among competitorsshould be considered, nottherivalry amongsuppliers.

According to Porter, there are two fundamental questions that determine competitive strategy. Of these two questions, the one that the firm has the most control over is whether the:

industry is attractive.

firm can position itself to have a competitive advantage. industry is profitable.

Explanation

The firm typically has little control over the industry's long-term attractiveness, but it has a great deal of control over its choice of competitive position.

Which ofthefollowingleast accurately identifies one of Porter'sfive competitiveforcesthatdeterminesthe attractiveness or profitability of any industry?

Threat of rivalry. Entry of new competitors. Bargaining power of buyers.

Explanation

Porter'sfive competitiveforces aretheentry of new competitors,thethreat ofsubstitutes,the bargaining power of buyers,the bargaining power of customers, andtherivalry amongexisting competitors.

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Question #14 of 73

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A visionary approachhas more in common with the classical approach than the shaping approach.

A visionary approach differsfrom the classical approach as a visionary company must continually reassessitsgoals.

An adaptive approach is most appropriatefor a company in an industry thatis highly predictable but not malleable.

Explanation

The visionary strategist must committime andresourcesto thestatedgoal and notdeviatefrom it.Theshapingstrategy involvesshort planning cycles andflexibility.

Zanzibar Zanies, a novelties manufacturer,faces a number of competitive problems.Itdecidesto usethesix-step processto determine how Porter'sfiveforces affectitsindustry. Zanzibar justfinishedidentifying competitors, buyers,suppliers, potential entrants, and potential substitutes.The nextstep isto:

assess possible changes in each force.

determinethestrength or weakness ofeach ofthefiveforces.

analyzetheindustry structure anddetermine how each ofthefiveforces affect pricing.

Explanation

The process ofidentifying competitors, buyers,suppliers, potential entrants, andsubstitutesisStep 2 ofthe process.Step 3is to determinethestrength or weakness oftheforces.

Which ofthefollowingstatementsregarding pricing powerismost accurate?

A company operating in an industry with a high intensity of rivalry will have a high level of pricing power.

A company operatingin an industry that has a low threat ofentrants will have a low level of pricing power.

A company operatingin an industry that has high barriersto entry will have a high level of pricing power.

Explanation

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Question #17 of 73

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Question #18 of 73

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Question #19 of 73

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Which ofthefollowingis NOT one of Porter'sfivefactorsusedto determineindustry competition? Rivalry among existing competitors.

Purchasing power of consumers. Bargaining power of buyers.

Explanation

Purchasing power of consumersis not one ofthefiveforcesthat Porter believesto determinetheintensity of competition within an industry.The othertwo choices are, along with thethreat of new entrants andthethreat ofsubstitute products.

Which ofthefollowingfactors associated with industry competition affectthe performance of a firm within thatindustry? The industry's stage in its life cycle.

Threat of new entrants.

Industry operating leverage.

Explanation

New entrantsrepresentincreased competition and lower profitability.

Thefashion industry changesrapidly and companies within theindustry must be ableto respond quickly to the latesttrends. Themost appropriate approach to strategic planning would be:

adaptive as the industry is not predictable or malleable. adaptive astheindustry is not predictable butis highly malleable. shaping astheindustry is predictable but not malleable.

Explanation

The adaptive approach should betaken when theindustry is not predictable or malleable.

Long-term profitability isdetermined by: cost leadership.

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Question #20 of 73

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Question #21 of 73

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Question #22 of 73

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Industry structuredetermines long-term profitability.

A company undertaking a visionary approach to strategic planningisleast likelyto focus on:

being flexible and swiftly change course in reaction to changes in the industry. a longterm goal and commitresourcesto it.

alteringtheindustry it operatesin with theintroduction of new platforms and products.

Explanation

The visionary approach involvessetting a goal andstickingto itratherthan reactingto theindustry.

Which one ofthefollowingleast accurately identifies a competitiveforce accordingto Porter's article? Rivalry among existing customers.

Bargaining power of buyers. Entry of new competitors.

Explanation

Porter'sfive competitiveforces arethethreat of new entrants,thethreat ofsubstitutes, bargaining power ofsuppliers, bargaining power of customers, andtherivalry amongexisting competitors.

For pharmaceutical companies,thetimeittakesto get a drugthrough the clinical trials,regulatory approval andfinally to the marketis approximately 12 years.In a competitivestrategy analysis,this lengthy pre-product period wouldraise concerns aboutthe:

rivalry among existing suppliers. threat ofsubstitutes.

bargaining power of buyers.

Explanation

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Question #23 of 73

Question ID:463024

DavideAndreuis concerned aboutthe possibleimpact ofinflation on two German retailersthat he coversin hisequity analyst role.Andreu hasused last year'sfinancialsto produce common sizeincomestatementsforthetwo retailers asshown below.

Tooboola GmbH Portentona GmbH

Sales 100% 100%

Cost of GoodsSold 38% 48%

Gross Margin 62% 52%

Sales, General & Admin 40% 20%

Depreciation 5% 15%

Operating Margin 17% 17%

Andreuisforecastinginflation of10% in cost ofgoodssoldfor both companiesdueto largeincreasesin commodity pricesin the next period.Dueto thefragilestate oftheeconomic recovery does notexpecteither company to be ableto passthese costs on to consumers.Sales,general and admin costs are likely to rise by 5% and accountingdepreciation will be unaffected.

IfAndreu'sforecasts are correct, which ofthefollowingstatementsisleast accurate?

Both companies will experience the same decrease in gross margin. Theforecasted operating margins will beequal forTooboola and Portentona. Tooboola has a largerforecastedgross margin than Portentona.

Explanation

Tooboola Toobola

Forecast

Portentona Portentona

Forecast

Sales 100% 100% 100% 100%

Cost of Goods Sold

(x1.10)

38% 41.8% 48% 52.8%

Gross Margin 62% 58.2% 52% 47.2%

SG&A (x1.05) 40% 42.0% 20% 21.0%

Depreciation 5% 5.0% 15% 15.0%

Operating Margin 17% 11.2% 17% 11.2%

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Question #24 of 73

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Question #26 of 73

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Teletharetic Inc. hasrecently introduced a new pain killerin the market based on a patentgrantedearlierin the year.The patent will expirein 5 years.Stanton Wardis an analyst coveringthe company for hisfirm andisinterested on theimpactthe patent will have on the company. Which ofthefollowing conclusionsismost appropriate?

The company can expect to see an increase in ROIC caused by the increase in revenue and PPE.

The company can expectto see a decreasein ROICdueto theincreasedinvestment requiredto fundthe patentdevelopment.

The company can expectto see a higherROICforthe perioddueto the competitive advantage bestowed by the patent.

Explanation

The patent will givethe company a competitive advantageforthe next5 years.Asustainably high ROICisusually a sign of competitive advantage.Higherinvestmentshould not berequired asthe product has already been introduced.Additionally, higherrevenues and PPE would not necessarily leadto a higherROIC.

A common mistake when decidingupon a strategic approach is misplaced confidence.Thisinvolves:

Underestimating how malleable an industry is and underestimating how predictable it is.

Underestimating how malleable an industry is and overestimating how predictableitis Overestimating how malleable an industry is and overestimating how predictableitis

Explanation

Executives often display misplaced confidence believingthatthey can affecttheindustry with their actions andthatthey can confidently predict wheretheindustry isgoing.

Porter's five factors for determining the intensity of competition within an industryare least likely to include:

regulatory environment. bargaining power of buyers. threat of new entrants.

Explanation

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Question #30 of 73

Question ID: 462997

Question #31 of 73

Question ID: 463013

Question #32 of 73

Question ID: 472534

$5,328,000. $5,337,000.

Explanation

Number of customers2011 = $20,050,000/$225 = 89,111

Number of customers2013 = $20,155,000/$218 = 92,454

SG&A per customer 2013 = $5,240,000/92,454 = $56.68

CAGR customersusing past two

years = (92,454/89,111) − 1 = 1.86%

Forecastednumber of customers

2014 = 92,454 × 1.0186 = 94,172

ForecastedSG&A per customer

2014 = $56.68 × (1 − 0.02) = $55.54

Forecasted SG&A 2014 = $55.54 ×94,172 = $5,230,637

Zipla Inc is anemerging bio-tech company specializinginneurological diseases. One of Zipla'sdrug,Apsia isscheduledto go off patent protection laterthis year.This change wouldmostlikely bring out changesin which Porter'sforce?

Bargaining power of buyers. Bargaining power ofsuppliers. Threat ofnew entrants.

Explanation

Uponexpiration of patent protection,threat ofnew entrantsincreases.Bargaining power ofsuppliers may not be affected(not enough information) and bargaining power of buyers would change only ifnew firmsenterthe market.

Which ofthefollowingsituationsis a shaping approach to strategy formulation bestsuited?

Low predictability and highly malleable High predictability and highly malleable Low predictability andnot highly malleable

Explanation

Shapingis appropriate wheretheindustry isnot very predictable but lendsitselfto beingshaped by industry players.

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Question #33 of 73

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Question #34 of 73

Question ID: 463020

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Question #35 of 73

Question ID: 463007

Bargaining power of buyers. Rivalry amongsuppliers. Threat ofsubstitute products.

Explanation

Porter'sfiveforces are:rivalry among current competitors,threat ofnew entrants,threat ofsubstitutes, bargaining power of suppliers, and bargaining power of buyers.

Which ofthefollowingstatementsis most accurate?

Companies in the growth phase of their life must use a visionary approach to ensure continued growth

Companiestheemploy only a classical approach to strategic planning are more likely to fail thanthosethattake a visionary approach

Start-ups and companiesindecliningindustriestend commonly useshaping or visionary approachesto strategic planning

Explanation

Start-ups havethe opportunity to shapetheindustry and companiesin a decliningindustry often createnew opportunities and marketsthrough shaping or visionary approaches.Cisincorrect asthereadingemphasizesthateach ofthe approaches can bethe best approach depending ontheindustry.

Forthe purpose offorecasting proforma financial statements, which ofthefollowingstatementsismost accurate?

Forecasted depreciation rates are usually based on historic information whereas forecasted capital expenditure is usually based on forecasted data. Forecasted capital expenditureisusually based on historic information whereas forecasteddepreciationrates areusually based onforecasteddata.

Forecasteddepreciationrates and capital expenditure areusually based on forecasteddata.

Explanation

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Question #36 of 73

Question ID: 462999

Question #37 of 73

Question ID: 463017

Demandinthe oil industry can beforecasted with a high degree of accuracy, but anindividual company has little powerto alterthedynamics oftheindustry. Which ofthefollowingisthemost appropriatestrategic planning approach?

Shaping. Adaptive. Classical.

Explanation

The classical approach is most appropriatefor anindustry thatis predictable butnot malleable.

Martin Kemp, owner of a fast-growingfooddistributor with one ofthestate's largesttruck fleets, wantsto buy up most ofits smallertruckingrivalsin aneffortto increaseitsscale andefficiency,thusfattening profit margins.Two of Kemp's advisers warnthatthestrategy could backfire.

BartAblesays: "If you clear outthe competition andincrease profit margins,the business coulddraw the attention of larger companiesthat haveso farstayed out ofthisregion."

Andrea Bakersays: "If youraise prices ontruck shipping, more customers will optto ship intheirfood by train." Both Able andBaker concludethat Kemp's acquisitionstrategy could actually endup reducing profit margins. Which arguments are valid?

Only Baker's. Only Able's.

Both Able's andBaker's.

Explanation

Both Able andBaker offer legitimatereasons why an acquisitionstrategy mightnotresultinsustainable marginimprovement. Both may turn outto be wrong, buttheir arguments have merit.

Ben Lorsonis analyzingtherevenuegrowth ofSymphonica Inc., a retailer of audio visual equipment.Relevantdata forthe last two yearsisshown below:

2013 2012

$ millions $ millions

Revenue 1,408 1,375

Total marketsize 17,606 17,450

$ billions $ billions

Nominal GDP growth 16,451 16,400

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Question #38 of 73

Question ID: 462998

Questions #39-42 of 73

1. AssumethatSymphonica retainsits2013share ofthe marketfor2014, andthetotal marketgrows atthesamerate asit did last year.

2. Assumethatrevenuegrowth rateisequal to previous year'snominal GDP growth rate.

3. A bottom-up approach which assumesthatthegrowth rate ofSymphonica'srevenue will bethesame as last year Which ofthefollowingstatementsregarding Lorson'sforecastismost accurate?

Lorson's market growth and market share model predicts a higher 2014 revenue figure for Symphonica than his bottom-up approach.

Lorson'sgrowth relativeto GDP growth model predicts a higher2014revenuefigure forSymphonica than his marketgrowth and marketshare model.

Lorson's bottom-up approach predictsthe highestrevenuefor2014.

Explanation

Market growth and market share approach (method1)

2013 market share 1,408/17,606 = 8.00%

2013 total market growth 17,606/17,450 − 1 = 0.89%

2014 total market 17,606 × 1.0089 = 17,763

2014 revenue Symphonica 17,763 ×8.00%= 1,421

(Alternatively, as market share isstatic, revenue growth = market growth =

0.89%)

Growth relative to GDP model (method2)

2013nominal GDP growth 16,451/16,400 − 1 = 0.31%

2014 revenue Symphonica 1,408× 1.0032 = 1,412

Bottom-up (method3)

2013 revenue growth 1,408/1,375 − 1 = 2.4%

2014 revenue Symphonica 1,408× 1.024 = 1,442

Cost-effective video streamingservice hasimpactedthe business of video disk rental companies.Thisismostlikely a change in which Porter'sforce?

Bargaining power of suppliers. Bargaining power of buyers. Threat ofsubstitutes.

Explanation

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Question #42 of 73

Question ID: 462976

Question #43 of 73

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Question #44 of 73

Question ID: 463026

Question #45 of 73

Question ID: 463006

Smith notesin herreportthatthe West Winery mightdifferentiateits wine product on attributesthat buyers perceiveto be important. Which ofthefollowing attributes would bethemostlikely area offocusforthe West Winery to create a differentiated product?

A focus on customers aged 30 to 45. The price ofthe product.

The method ofdelivery forthe product.

Explanation

Productdifferentiation can be based onthe productitself,the method ofdelivery, orthe marketing approach.(Study Session

11, LOS39.b)

Accordingto Porter's Five Forces, which ofthefollowingisleastlikelyto be considered when analyzing a firm's competitive strategy?

The bargaining power of competitors. The bargaining power ofsuppliers. The bargaining power of buyers.

Explanation

The bargaining power of buyers and bargaining power ofsuppliers arerelevant, butthe bargaining power ofemployeesisnot one ofthe Five Forces.

Yolanda Resham is currently developing a forecast horizonforseveral companiesthatshe coversin herrole as anequity analyst.Theequitiesunder consideration are part of a portfolio with an average annual turnover of25%. Which ofthe

followingstatementsisleastaccurateregardingthe choice oftime horizon?

Cyclicality should be considered when developing the timeframe. Atime horizon of4 years would be consistent with the portfolio turnover.

Thetime horizonshould beindependent ofthe average holding periodfor a stock.

Explanation

The holding periodshould be considered.An average annual turnover of25% is consistent with a holding period of4 years

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Question #47 of 73

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Question #4

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A business analyst who approachesstrategic planningusing Porter'sfiveforcesis most likely using a:

adaptive approach shaping approach classical approach

Explanation

Fiveforces analysisis a manifestation ofthe classical approach

Garcia Mendoza is currently forecastingrevenueforRemnicky Inc., a global provider ofsportsstatisticsto broadcasters. Mendoza isforecastingthatRemnicky'srevenue will grow 1% fasterthanglobal nominal GDP next yeardueto anincreased

interestintrackingstatistics worldwide.In consultation with hiseconomic research department, Mendoza has predictedthat thereal global GDP will grow at1% next year, beforeflattening out andshowing zero growth forthenext4 years.Inflationis predictedto remainsteady at1.5% forthenext5 years. Which ofthefollowingstatements about Mendoza'sforecastfornext yearismost accurate?

Mendoza is forecasting growth of 3.5% using a hybrid approach. Mendoza isforecastinggrowth ofusing a 3.5% top-down approach. Mendoza isforecastinggrowth ofusing2.5% a top-down approach.

Explanation

Mendoza isusing a top-down approach as heis modelingrevenue by starting with a forecast oftheentireeconomy. The predictedgrowth rateis1% fasterthannominal GDP = 1% + 1.5% + 1% = 3.5%.

With respect to industryattractiveness, the key concern is whether the:

industry is currently experiencing significant sales growth. industry is currently profitable.

industry isattractive in terms of long-term profit potential.

Explanation

The key concern of industryattractiveness is whether the industry isattractive in terms of long-term profit potential.

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Question #4

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Question ID: 463014

Questions #50

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51 of 73

Grempton. Willie Grant, owner of Grant'sCandies,isecstatic aboutthenew business and putsin a bidfor a vacation home based on his higherexpected profits.AccountantCallieTrakh,CFA, warns againstgettingtoo excited.Her chief concernis mostlikelyfears of:

a population exodus should the economicclimate change and the factory shut down.

aninflux ofnew competitors.

new andinnovative productsenteringthe market.

Explanation

While all ofthe concerns listed are legitimate worriesfor any business, we haveno informationthat particularly bears onnew products oreconomic issues.However, a larger market and highergrowth is likely to attract competitorsto the market.

A company that hasthe ability to shape anindustry, andis ableto predictthe path to realizingitsgoal should adopt an approach to strategic planningthatis bestdescribed as:

adaptive. visionary. classical.

Explanation

A company that canshapetheindustry (i.e.,theindustry is malleable) and predictthe path shouldtake a visionary approach.

JoanSmith,CFA,is preparing a report on Vis-Com Corporation. Vis-Com develops mixed-signal semiconductorsthatenable thefeatures ofsmall panel displaysin mobile phones. Joan begins herresearch by reviewingthe President's Letterfrom the annual report.Below areexcerptsfrom the letter:

Vis-Com Corporation 20X4 Annual Report President's Letter

Dearfellow shareholders,

[1] Thesuccess of our company has alwaysdependedupon our ability to provideinnovationsforsmall panel displays, which has kept our company atthe leadingedge of visual communications. [2] In20X4, we launched key new display technologies,

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Question #50 of 73

Question ID: 462954

Question #51 of 73

Question ID: 462955

patterns prevalentinthe mobile handset market. [9] Assuch, orders may be cancelled or customers may delay shipment

dates. [10] Inthethird quarter ofthe year, weexperienced a significantreductioninsales of ourTFT productsdueto pricing pressure placed on components manufacturers by mobile handset manufacturers, and weexpectthisreductioninsalesto continuethrough thefirst quarter of20X5.

[11] Our businessstrategy isto focus onthedesign,development, and marketing of mixed-signal semiconductors. [12] As such, we outsource all of oursemiconductorfabrication, assembly, andtesting, which reducethe capital intensity of our business. [13] Because wedo not have long-term fixed pricesupply contracts with ourfoundry contractors, our wafer costs

fluctuate with the cyclical demandforsemiconductors andthe availability offoundry capacity. [14] Giventhe high costto bring on a new foundry contractor, we liketo work with the contractors who already know our products. [15] In20X4, our margins were adversely impacted by the higher cost of purchasingfabricated wafers.

[16] Thank youfor your continuedsupport, as we look forwardto a profitable20X5.

Usingtheinformation providedinthe President's Letter and Porter's competitive analysis concepts,determine whetherthe bargaining power ofsuppliersisfavorable orunfavorablefor Vis-Com and which sentencessupportthis conclusion:

Favorable orUnfavorable SupportingSentences

Favorable 7, 8

Unfavorable 11,12

Unfavorable 13,14

Explanation

The conclusion ofunfavorableis correct.Thefirm isfaced with the high cost ofswitchingsuppliers assupportedinsentence

14.In addition, a shortage ofthesuppliers' products adversely affectedthefirm's costs(sentence13).Thesefactors contributeto greater bargaining powerforthefirm'ssuppliers.

The conclusion offavorableisincorrect.Sentences7 and 8 discussthefirm'sindustry environment anddo notspecifically mention Vis-Com'srelationship to itssuppliers.

Sentences11 and12discussthefirm's business model, which involves outsourcing.However,the bargaining power ofthe suppliersisnotdiscussed.(LOS32.a)

Usingtheinformation providedinthe President's Letter and Porter's competitive analysis concepts,determine whetherthe bargaining power of buyersisfavorable orunfavorablefor Vis-Com and which sentencesupportsthis conclusion:

Favorable orUnfavorable SupportingSentence

Unfavorable 6

Favorable 3

Unfavorable 7

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Question ID: 462985

Question #53 of 73

Question ID: 463028

Sentence 6 indicatesthattwo buyersrepresent virtually all ofthefirm'ssales volume.This concentration of buyer powergives the buyers leverage overthefirm, which isunfavorable.

Sentence7discussesingeneral termsthat customersrely on Vis-Com forinnovative products.Thesentencedoesnotspecify the bargaining power of buyers.Iftherelianceis very high,thenthe customer's bargaining poweris weak,so thissentence would possibly indicate a favorable conclusion.

Sentence3discussesthe product line ofthe company.Specifically,thefirm relies on a few productsfor most ofitsrevenue. Thesentencedoesnotdiscussthefirm'srelationship to the buyers ofthose products.(LOS32.d)

If an analyst was assessing a pharmaceutical company's competitivestrategy,the length ofthedrug patent would berelated

to which of Porter's Five Forces? Bargaining power of buyers. Threat ofnew entrants(Entry barriers). Rivalry amongexisting competitors.

Explanation

Longdrug patents makeentry into theindustry difficult; thereforethisrelatesto barriersto entry.

Dan Patrino is currently constructing pro-forma accountsforRoolingInc., anengineering company basedintheU.S.He has puttogetherthefollowingforecastforthenext3 years:

2013 2014E 2015E 2016E

$millions $millions $millions $millions

Sales 935 954 973 993

PPE (NVB) 295

EBITDA 239 253 278

NetIncomefor

year 95 107 130

Partrino isnow forecastingthe balancesheet andintendsto usethefollowing assumptions: Capital expenditure will remain constant at2.5% ofsalesfortheforeseeablefuture.

Depreciation will be1.5% ofsalesin2014,1.7% ofsalesin2015 and1.9% ofsalesin2016. Partrino'sforecast ofthenet book value of PPE attheend of2016 isclosestto:

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Question #54 of 73

Question ID: 463018

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Question #55 of 73

Question ID: 462960

ᅞ A) ᅞ B) ᅚ C) Explanation

2013 2014E 2015E 2016E

$millions $millions $millions $millions

Sales 935 954 973 993

Capex(% sales) 2.5% 2.5% 2.5%

Capex($m) 24 24 25

Depreciation(%

sales) 1.5% 1.7% 1.9%

Depreciation($m) 14 17 19

Net PPE 295 305 312 318

When comparing a large company with a much smaller company, which ofthefollowingstatementsregardingeconomies of

scaleismost accurate?

An analyst willconclude that economies of scale are present in the industry if the larger company has higher revenues and a higher gross profit margin. An analyst will concludethateconomies ofscale are presentintheindustry ifthe larger company has higherrevenues and highergross profit.

An analyst will concludethateconomies ofscale are presentintheindustry ifthe smaller company has a highergross margin and lowerrevenues.

Explanation

Economies ofscale areevidenced by larger companiesdisplaying largergross margins.Having a largerrevenuefigure and a largergross profitdoesnotnecessarily imply a larger margin.

Accordingto Porter's Five Forces, all ofthefollowingshould be considered when analyzing a firm's competitivestrategy EXCEPT:

threat of substitutes. bargaining power ofsuppliers.

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ᅞ A)

Which statementmost accurately portraystherivalry amongexisting competitorsintheindustry? Rivalry amongexisting competitorsintheindustry is:

very low. moderate. very high.

Explanation

Rivalry amongexisting competitorsintheindustry is moderate. Whileitis limiteddomestically,theexport businessis substantially more competitiveduein large partto several international companies having well-developeddistribution networks.(Study Session11, LOS32.d)

Are Palmer'sstatementsregardingthethreat ofsubstitutes withintheindustry correct orincorrect? Only statement 1 is correct.

Only statement2is correct. Both statements are correct.

Explanation

Substitutesexist, butthisthreatisrelatively low dueto the premium nature of Molvania's products,so Statement1is correct. Thethreatshouldnot be considered as very low dueto theexistence of competitors who also make premium products,so Statement2isincorrect.(Study Session11, LOS38.b)

Are Palmer'sstatementsregarding pricesensitivity and bargaining power of buyers correct orincorrect? Both statements are correct.

Only statement4is correct. Only statement3is correct.

Explanation

Since a premium productis being offered, pricesensitivity is of limitedimportance,so Statement3is correct. Onthe other hand,dueto the presence of other competitors worldwide, pricingissues cannot beignored,so Statement4is also correct. (Study Session11, LOS38.b)

Theintroduction of mass productionto the automobile marketthatrevolutionizedtheindustry is anexample of:

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ᅚ B) ᅞ C)

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ᅚ A)

a visionary approach to strategic planningtaking advantage of a malleableindustry. an adaptive approach to strategic planningtaking advantage of a predictableindustry.

Explanation

Mass produced cars were anentirely new idea andshapedtheindustry that Ford werein.

Which of the following is NOT one of Porter'sfive factorsdetermining the intensity of competition withinan industry?

Rivalry among existing competitors.

Threat ofsubstitute products.

Bargaining power of the firm's creditors.

Explanation

The bargaining power of the firm's customersandsuppliersalong with the threat ofsubstitute products, the threat ofnew entrants,and the rivalryamong existing competitors comprise Porter'sfive factors.The bargaining power of the firm's creditors isnot one of Porter'sfive

factors.

Joel Mason, owner of a ball-bearingfactory inCleveland,findstwo interestingstories whilereadingTheWallStreetJournal at breakfast.Hereadsthatthegovernmentinstituted a tariff onimported bearings, andthat overall sales of ball bearingsinthe regionrose18% overthe lastyear. Ofthetwo changes mentioned above, which are likelyto have a positiveeffect on Mason's company overthe longrun?

The higher industry growth rate. Neither ofthem.

Thenewly passedtariff.

Explanation

Neither oftheissues presented are likelyto have any long-term effect onthe company, asthe marketgenerallyrespondsto such changes andfinds a new equilibrium.High growth ratestendto attract more competitors, andtheeffectiveness oftariffs is questionableevenintheshortterm.

When an analystisdeveloping longterm projections ofearningsfor a company, which ofthefollowingstatementsisleast accurate?

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ᅞ B)

ᅞ C)

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ᅞ A)

ᅚ B)

ᅞ C)

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Whenforecasting longterm earningsfor a highly cyclical company, anexpected mid -cycle level ofearningsshould beused.

A perpetuityshould only beusedifthe analystdoesnot anticipate anyinflection points occurringintheindustry oreconomic environment.

Explanation

The mostrecentearningsfigure maynotsustainable. Evengrowing companies mayface a downturndueto changesinthe

industry.The mostrecentdata isnotnecessarilythe most appropriate.

Which offollowingis NOT one of Michael Porter'sfactorsusedto determine competitionin anindustry? Threat of new entrants into the market.

Bargaining power ofthefirm with itssuppliers. Capital structure andfinancial flexibility.

Explanation

Porter's competitivefactors are:rivalry amongtheexisting competitors; threat ofnew entrants; threat ofsubstitute products; bargaining power of buyers; bargaining power ofsuppliers.

Daniel Tiptonand Jesse Torrez are first-year MBAstudentsat the HaasSchool ofBusiness.Torrez hasan economics background, but

Tipton's backgroundisin music.To help Tiptonstudy one of the main tenets of competition theory,Torrez creates the following question andasksTipton to identify the statement that is mostinconsistent with Porter'sfive forces. Which statement shouldTiptonselect?

To sustain above average returns on invested capital, firms should strive for economies of scale.

Porter'sfive forcesare: rivalryamong current competitors, economies ofscale, threat of substitutes, bargaining power ofsuppliers,and bargaining power of buyers.

Supplier power is higher when there are onlyafew suppliers to anindustry.

Explanation

Porter'sfive forcesare: rivalryamong current competitors,threatofnewentrants, threat ofsubstitutes, bargaining power ofsuppliers,and

bargaining power of buyers. Economiesofscale are a way to lessen the threat ofnew entrants, but are not the only way todiscourage competition.Companies canalso have barriers to entrysuch as regulationor high start up capital.The other choicesare true.

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ᅚ A)

ᅞ B) ᅞ C)

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relative price performance of substitutes, buyer propensity to substitute, and switching

costs.

relative price performance ofsubstitutes, presence ofsubstitute inputs,andswitching costs.

buyer propensity tosubstitute, presence ofsubstitute inputs,andswitching costs.

Explanation

The threat of product substitutionisdriven byavailability, prices,and cost ofswitching toother productsinaddition to the inclinationof

the buyer toswitch.

Mary Mooreis preparing a reportonthe commercial bankingindustry.Asshegleanedinformationfrom the competitors annual reportssheencounteredthefollowingstatementsintheCEO's letterstotheirshareholders andthe Management

Discussion andAnalysis(MD&A)section:

William Spencer,CEO of WesternBanks,statedinthe MD&A: "Consolidation withintheindustry will continue atits current pace,or perhaps accelerate, as banking concernsseek toincreasetheir presence and marketshare."

MargaretAcosta,CEO ofSouthwestBanking,statedin her lettertotheshareholders: "Competitionis becomingincreasingly diverse as banks continuetoincreaseinsize andoffer productsrangingfrom insurance and mutual fundsto high tech

interaction with customers."

Maria Bellini,CEO ofAtlantic MercantileBanks,notedinthe MD&Athat: "Cost advantagesin mosttraditional banking activities seem to be mostlygonenow, which will impacttheindustryfuture profitability."

Mooreismostlikelytoreportthatthe commercial bankingindustry has high rivalry among competitors basedon:

Margaret and Maria's statements only. William and Margaret'sstatementsonly.

William and Maria'sstatementsonly.

Explanation

William and Maria'sstatementssupport argumentsforrivalry among commercial banksinthattheyindicatethat banks must

increase marketsharethrough mergers and acquisitions andthattraditional banking activities arenow commodities.

Margaret'sstatementsuggeststhat banks areofferingincreasinglydiverse productsin an attempttodifferentiate - the

oppositeof a commodity-type business.

PixOutInc.is a U.S. based manufacturerof waterproof cameras. PixOut's products aretypicallyused by leisure customers wishingtouse a camera forsnorkeling anddeep-sea diving.The cameras comein at a reasonable price point and are aimed

primarily atthe 'point andshoot' market.Recently, a rival manufacturer has brought anextremely cheap waterproof casefor

smart phonestothe market, andthisis having a definiteimpacton PixOut'ssales.

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Question #71 of 73

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Question #72 of 73

Question ID:462977

2014E

PixOut camerassold(units) 42,505 Salesofsmart phone covers(units) 11,044

Gruberis assumingthat a percentageofthe phone coversales have cannibalized PixOut camera sales.In predictingthesales for2014, heis assuming a 25% cannibalizationrate.In addition, heforecaststhe averageselling priceof a PixOut camera is $185 andthe averageselling priceofthesmart phone coveris$80.

Which ofthefollowingis closestto Gruber'sestimateoftherevenue lost by PixOutdueto cannibalizationin2014?

$265,056.

$5,898,000. $510,785.

Explanation

Number of phone coverssold 11,044

Cannibalization rate 25%

Number of camera sales lost 11,044 × 25% = 2,761

Revenue lost 2,761 × $185 = $510,785

Which of Porter'sforces would be affected bytheriseof big boxretailersforthe appliance manufacturingindustry? Threat of new entrants

Bargaining powerofBuyers Bargaining powerofsuppliers

Explanation

Big boxretailers became large buyers,squeezingthe marginsofthe manufacturers whose productstheysold.

Which ofthefollowing changestothe widgetindustryismostlikelytoresultin higher profitsfor all U.S. widget makers10 yearsfrom now?

Creation of a widget-makers'coalition that brokers allwidget deals.

Creationof a seriesofnew productsthatrequire widgets as components. Asharp increaseintheglobal demandfor widgets.

Explanation

Anincreaseindemandfor widgetsis likelyto boost profitsintheshortrun, but could attractnew competitors.Thesame can besaidfornew productsthat create a wider marketfor widgets.However,the creationof a widget-makers' coalition could

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Question #73 of 73

Question ID:462968

brokers all widgetdeals couldskew thefieldinfavorof producers,raising widget prices andthe profitsof companiesthat make them.

Significanteconomiesofscalein anindustry will reduceindustry competition byreducingthe:

threat of new entrants. bargaining powerofsuppliers.

threatofsubstitute products.

Explanation