Review Questions and Exercises
1 1. Visit the websites of several major restaurant chains.
Identify the industry(s) in which each one operates. Would
you categorize them in the same industry or in different
industries (for example, fast food, family restaurants, etc.)?
Why or why not?
2. Identify an industry that has low barriers to entry and one
that has high barriers. Explain how the difference in entry
barriers influences competitive behavior in these industries.
3. Identify some businesses whose sales have been adversely
affected by substitute products, Why has this occurred?
4. Identify an industry in which the suppliers have strong
bargaining
g power and another industry in which the buyers
have most of the bargaining power. How does this affect
potential profitability in the industries?
Chapter 2 Practice Quiz
True or False
1. A firm always operates in a single, distinct industry,
2. All industries follow the stages of the industry life-
cycle model.
3. The likelihood that new firms will enter an industry is
contingent on the extent to which barriers to entry have
been erected.
4. Higher capital requirements for entering an industry
ultimately raise average profitability within that industry.
5. Substitute products are produced by competitors in the
same industry
6. A key limitation of Porter's five forces model is its reliance
on resource-based theory,
Multiple Choice
7. Industry growth is no longer rapid enough to support a
large number of competitors in which stage of industry
growth?
A. growth
B. shakeout
C. maturity
D. decline
8. The intensity of rivalry among firms in an industry is
dependent on which of the following?
A. concentration of competitors
B. high fixed or storage costs
C. high exit barriers
D. all of the above
9. The decline in unit costs of a product or service that occurs
as the absolute volume of production increases is known as
A. production effectiveness.
B. effective operations management.
C. economies of scale.
D. technological analysis.
10. When switching costs are high,
A. customers are less likely to try a new competitor,
B. companies spend more on technology.
C. companies seek new suppliers to reduce costs.
D. none of the above
11. Which of the following is not a cost advantage
independent of scale?
A. proprietary technology
B. favorable locations
C. experience in the industry
D. high volume of production
12. What is occurring when those who purchase an industry's
goods and services exercise great control over pricing and
other terms
A. a high bargaining power of suppliers
B. a low bargaining power of suppliers
C. a balance of power among suppliers
D. none of the above
Case 2: Home Depot
Bernard Marcus and Arthur Blank founded Home Depot after Home Depot expanded into California in 1985, and by
losing their jobs in the home improvement industry in 1978. the following year, had amassed a total of sixty stores and
Their vision was to focus on the needs of the do-it-yourself sales of $1 billion. Home Depot continued to grow and
(DIY) market, specializing in building materials and lawn and entered the northeastern United States and Canada in sub-
5th garden equipment. Three stores were launched in the Atlanta sequent years, reaching 500 stores by 1997. Home Depot
1979, and four stores in south Florida were added in added a direct-mail interest by acquiring mail-order firm
1981. The firm posted sales of $50 million that year and went National Blind & Wallpaper Factory and direct-marketer
public. By 1983, Home Depot had opened stores in Louisiana Maintenance Warehouse.
and Arizona, with total sales exceeding $250 million.
area
in
Chapter 2 Industry Competition
39
Jersey in 1999, 40,000-square-foot outlets designed to com-
Home Deport launched Villager's Hardware stores in New workers throughout the Americas. Home Depot contin-
add large appliances to many of its stores. In 2000, Marcus Depot promotes a community focus through the Home
pete with traditional hardware stores. The firm also began to products stocked in a 130,000-square-foot facility. Home
ues to focus on the DIY customer, with more than 40,000
and Blank became co-chairmen, and former General Electric Depot Foundation.
executive Robert Nardelli was named president and CEO.
Aggressive expansion continued in 2001 when Home Case Challenges
Depot added another 200 stores and acquired Total Home,
a small home-improvement chain in Mexico. Marcus and
Blank stepped down as co-chairmen, and Nardelli assumed
the role in addition to his CEO responsibilities.
Having abandoned its Villager's Hardware concept the
previous year, Home Depot opened its first small store
about 60,000 square feet--in New York City in 2002.
The firm continued its expansion into Mexico, acquiring
Del Norte, a small chain in Juarez. Home Depot operates
over 100 stores in Canada and has opened a business-
development office in China.
Competitive pressure from Lowe's has caused Home BGI Retail, Inc., "Home Depot—Retail Is Detail Merchan-
Depot to aggressively upgrade its old stores, while con-
tinuing its growth efforts, and contributed to CEO Robert
Nardelli's ouster in 2007, when he was replaced by Frank
Blake. Sales peaked in 2008 amidst the housing crisis,
stagnated, and then rose again throughout the carly 2010s.
Today, Home Depot is the world's largest home Home Depot Foundation, http://homedepotfoundation.org
improvement chain and the second-largest retailer after
Walmart, amassing $79 billion in annual revenues, operat-
ing approximately 2,250 stores, and employing 371,000
1. Is it necessary for Home Depot to emphasize both the
DIY and contractor segments of the market to build and
maintain economies of scale? Is one segment tied more
closely to the general state of the economy than the other?
Explain.
2. Has competitive pressure from Lowe's caused Home
Depot to modify its business strategy? If so, how?
3. Do international opportunities exist for Home Depot
beyond North America?
Suggested Sources
dising Experts Team (MET)." Youtube, 10 August 2015,
https://www.youtube.com/watch?v=Fa08L46vOQE.
P. Goodfellow, "Lowe's Fails to Man Up Against Home Depot.
Underestimates Menards," Forbes, 26 May 2015, http:/
www.forbes.com/sites/forbesinsights/2015/05/26/lowes-fails-
to-man-up against-home-depor-underestimates-menards/
L. Lorenzetti, "Why Buy Online, Pickup in Store' Isn't
Working for Retailers," Forbes, 5 November 2015. http://
fortune.com/2015/11/05/online-store-pickup.
Simulation 101: Industry Fundamentals
Industry definition is not required in a simulation. It has tial for profit for each firm. If rivalry is high, then it is
already been defined for you, but there are two key con possible for most or all companies to lose money. This
cepts in this chapter that you should consider when making usually occurs in a simulation when virtual companies
strategy decisions. The first is the life-cycle stage of the end up in a price war to secure market share. There is no
industry. Most simulations provide narratives and indus- way to resolve this dilemma until enough team managers
try revenue growth data to aid in your decision making, decide that cutthroat competition is counterproductive
If your industry is young and growing, it is worthwhile to and raise prices. This is easier said than done because
consider expansions capacity, an emphasis on market- each player has an incentive to increase prices until doing
ing for the long term, and developing new products aimed so has a strong negative effect on demand. The result is
at meeting future needs. If your industry is mature, issues a guessing game because industry prices are not known
such cost containment and product reliability might be until after a round has been completed. Be warned that
some students might attempt to collude with others and
more important. Of course, all of these issues should be
considered to some extent, regardless of life-cycle stage.
agree to raise prices in unison. This is both unethical and
The second key concept from this chapter is the evalu- unlawful in the real world, and will invite the deserved
ation of existing rivalry. The text identifies a number of wrath of the administrator-your professor – if (and usu-
factors that increase rivalry, thereby reducing the poten- ally when) it is discovered.
40
Chapter 2 Industry Competition
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