CFA Level 2 - Equity Session 11 - Reading 39 The Five Competitive Forces that Shape Strategy - LOS e

CFA Level 2 - Equity Session 11-Reading 39 The Five Competitive Forces that Shape Strategy - LOS e (Practice Questions, Sample Questions) 1. According to Porter, there are two fundamental questions that determine competitive strategy. Of these two questions, the one that thefirm has the most control over is whether the: A) industry is profitable. B) firm can position itself to have a competitive advantage.(explanation: The firm typically has little control over theindustry’s long-term attractiveness, but it has a great deal ofcontrol over its choice of competitive position) C) industry is attractive 2. The choice of competitive strategy is driven by two fundamental questions. These fundamental questions involve: A) industry attractiveness and profitability. B) industry attractiveness and competitive advantage.(explanation: According to Porter, the two key questions indetermining a competitive strategy involve industryattractiveness and competitive advantage.) C) competitive advantage and industry growth. 3. Automation can help a firm improve its competitive position by affecting: A) new entrants to the industry. (explanation: Automatingproduction 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 substitutesor increase suppliers’ bargaining power.) B) suppliers’ bargaining power.C) the threat of substitutes 4. Zanzibar Zanies, a novelties manufacturer, faces a number of competitive problems. It decides to use the six-step process to determinehow Porter’s five forces affect its industry. Zanzibar just finishedidentifying competitors, buyers, suppliers, potential entrants, andpotential substitutes. The next step is to: A) assess possible changes in each force.B) analyze the industry structure and determine how each of the fiveforces affect pricing. C) determine the strength or weakness of each of the fiveforces (explanation: The process of identifying competitors,buyers, suppliers, potential entrants, and substitutes is Step 2of the process. Step 3 is to determine the strength or weaknessof the forces.)