Basics of Industry and Competitive Analysis

Assertion (A): PESTLE analysis is more concerned with an industry's growth rate and market share dynamics than with its long-run profitability.
Reason (R): Porter's Five Forces is mainly a framework for identifying themes or narratives that investors may want exposure to.

Assertion (A): A mature industry necessarily has a growth rate below broader economic activity.
Reason (R): In a mature industry, customer demand can migrate to a substitute, causing growth to decline.

Consider the following:
I. Sustaining innovation improves performance or adds marginal features without fundamentally changing functionality or operation.
II. Disruptive innovation is most likely to come from incumbents because they already have profitable businesses to defend.
III. The innovator’s dilemma describes the choice between investing in a disruptive innovation and accelerating decline of the existing business, or ignoring it and risking market-share loss.
How many of the above are most accurate?

Assertion (A): A potential tax on small parcel deliveries would be identified in a PESTLE analysis of an e-commerce retailer.
Reason (R): Porter's Five Forces evaluates threat of substitutes, threat of new entrants, bargaining power of customers, bargaining power of suppliers, and rivalry among existing competitors.

Consider the following:
I. Industry size is typically measured by total annual sales from the product or customer perspective rather than necessarily by all sales of each constituent.
II. Historical growth may be calculated either year over year or as a multi-year compounded annual growth rate.
III. If possible, industry growth should be broken out by contributions from volume and price or mix drivers.
How many of the above are most accurate?

Consider the following:
I. One limitation of third-party classification schemes is that changes in groupings over time can reduce comparability of prior-period industry statistics.
II. A multi-product company can always be classified without discretion whenever no segment has at least 60% of revenue.
III. Geographical considerations can make global schemes less useful for service industries that compete locally or nationally.
How many of the above are most accurate?

Assertion (A): The main purpose of industry and competitive analysis is to determine a company's business model and capital structure.
Reason (R): The process begins with defining the industry and ends with evaluating a company's competitive positioning in that industry.

Consider the following:
I. Classification by geography is typically based on the geographic composition of revenue.
II. Grouping by statistical similarities can include valuation ratios, growth rates, profitability ratios, and price-performance statistics.
III. Groupings based on ESG characteristics tend to show more turnover than industry and country groupings because the underlying statistics are less stable by company.
How many of the above are most accurate?

Consider the following:
I. Cost leadership is especially appropriate when customers are price conscious and do not value or notice product differences.
II. Differentiation may defend against supplier power because the company can pass along cost increases to customers or absorb them within margin.
III. A company that is neither a cost leader, nor differentiated, nor focused is described as being stuck in the middle.
How many of the above are most accurate?

Consider the following:
I. Commercial schemes such as GICS, ICB, and TRBC use a demand approach centered on similarity of products or services sold.
II. These commercial schemes are strictly hierarchical taxonomies that assign a company to multiple lowest-tier groups when it has several business lines.
III. TRBC differs from GICS and ICB in that it also covers private companies, non-profits, and government entities.
How many of the above are most accurate?

Assertion (A): Rising industry concentration is generally associated with lower competitive intensity and higher profitability.
Reason (R): The Herfindahl-Hirschman Index is calculated as the sum of the squares of competitor market shares stated as whole numbers.

Consider the following:
I. Defining the industry comes before surveying its size, growth, profitability, and market share trends.
II. External influences are assessed before Porter’s Five Forces because profitability is determined outside the industry first.
III. Evaluating a company’s competitive positioning is the final step in the process shown in the module.
How many of the above are most accurate?

Assertion (A): Industry was found to be the most important factor in the sustainability of economic profits over time.
Reason (R): Sell-side analysts who covered both companies and their suppliers made more accurate earnings forecasts than analysts who did not.

Consider the following:
I. A growth industry is one that has not yet fully penetrated its total addressable market and may have idiosyncratic growth drivers apart from broader economic growth.
II. Mature industries are described as having growth rates that are always exactly zero once saturation is reached.
III. Sensitivity to the business cycle is driven partly by whether the product is a durable or capital good versus a recurring purchase such as consumables or subscriptions.
How many of the above are most accurate?

Assertion (A): A company that is neither a cost leader, nor differentiated, nor focused is described as being stuck in the middle.
Reason (R): Despite company-specific variations, the generic strategies of cost leadership, differentiation, and focus explain a large percentage of strategies in practice.

Consider the following:
I. Sensitivity to the business cycle is presented as an industry attribute rather than a company-specific attribute.
II. Competitive strategy is identified as an industry-wide structural factor rather than a company-specific characteristic.
III. Business model variation is listed as a company-specific source of variance around the industry median.
How many of the above are most accurate?

Assertion (A): Disruptive innovation is more likely to come from new entrants than from incumbents.
Reason (R): Incumbents often face an innovator's dilemma because investing in the disruptive offering can speed the decline of their existing profitable business.

Consider the following:
I. Network effects, economies of scale from fixed costs, and significant customer switching costs are all factors that can deter new entrants.
II. The curriculum treats incumbents’ experience and expertise as sustainable barriers to entry because entrants cannot imitate them quickly.
III. Exclusive or preferential access to hard-to-obtain inputs or end-customer interfaces can strengthen entry barriers.
How many of the above are most accurate?

Consider the following:
I. The Herfindahl-Hirschman Index is calculated as the sum of the squares of competitor market shares stated as whole numbers.
II. A market with shares of 30, 30, 20, and 20 has an HHI of 2,600.
III. The curriculum states that acquisitions in markets with an HHI above 1,500 are always challenged if the HHI increase exceeds 200 points.
How many of the above are most accurate?

Assertion (A): If an industry is well defined, its size is best measured as the sum of total annual sales of all constituent companies.
Reason (R): Industry size is usually measured from the product or customer perspective, so only the sales relevant to that industry should be included.

Assertion (A): In commercial classification schemes such as GICS, ICB, and TRBC, a company is assigned to a single group in the lowest tier.
Reason (R): These schemes are strictly hierarchical taxonomies, so classifying a company at the lowest tier automatically places it in the higher tiers.

Assertion (A): Grouping companies by geography is typically based on the geographic composition of revenue because that best captures economic exposure.
Reason (R): Country classification is typically based on incorporation, primary listing, headquarters location, or market perception.

Assertion (A): When identifying competitors, an analyst may need to treat a business segment as relevant even if its parent company is classified in another sector.
Reason (R): Commercial classification schemes solve the multi-product problem by assigning each segment of a company to its own lowest-tier industry group.

Consider the following:
I. An analyst should assess whether a company’s strategy creates a defense against the five industry forces.
II. A strategy can be considered sound even if it is at odds with the expected external influences identified in a PESTLE analysis, provided it is intentional.
III. The analyst should assess whether the company has the resources and capabilities necessary to execute the strategy.
How many of the above are most accurate?

Assertion (A): A focus strategy may incorporate elements of both cost leadership and differentiation while targeting a particular customer group, product set, or geography.
Reason (R): A focus strategy is most appropriate when larger competitors can serve the target group more economically than specialized firms can.

Consider the following:
I. Industry and competitive analysis is used to estimate an industry's base rate of profitability and its determinants.
II. McGahan and Porter found company-specific effects were larger for high performers than for low performers in an industry.
III. Industry and competitive analysis can sharpen forecasts by helping analysts understand competitive actions across suppliers and peers.
How many of the above are most accurate according to the CFA Curriculum?

Consider the following:
I. A substitute may threaten an industry if it fulfills a similar customer need at a lower price.
II. PESTLE analysis is primarily concerned with determinants of long-run profitability in the same way as Porter’s Five Forces.
III. The curriculum describes political, economic, social, technological, legal, and environmental influences as more concerned with growth rate and market share dynamics.
How many of the above are most accurate?

Assertion (A): Industry and competitive analysis helps an analyst estimate an industry base rate for profitability and then judge a firm's position against that base rate.
Reason (R): Competition tends to pull company profitability toward an industry base rate over time.