Chap002TB - CHAPTER 2 THE EXTERNAL AND INTERNAL...

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CHAPTER 2 THE EXTERNAL AND INTERNAL ENVIRONMENTS TRUE/FALSE Learning Goal 1 Identify the major components of an organization’s task environment. Level of Learning 1 (Knows basic terms and facts) 1.1. The general environment and the task environment are components of the internal environment. Answer: False LG: 1/LL: 1 Page: 28 AG: 13 1.2. The external environment constitutes everything outside a firm that might affect the ability of the enterprise to attain its goals. Answer: True LG: 1/LL: 1 Page: 28 AG: 13 1.3. One of the most popular frameworks for analyzing the task or industry environment is a model developed by Michael Porter known as the unique forces model. Answer: False LG: 1/LL: 1 Page: 29 AG: 13 1.4. Barriers to entry are factors that make it costly for potential competitors to enter an industry and compete with firms already in the industry. Answer: True LG: 1/LL: 1 Page: 30 AG: 13 1.5. The bargaining power of buyers is a component of the five forces model. Answer: True LG: 1/LL: 1 Page: 29; figure 2.2 AG: 13 1.6. The threat of substitute products is a competitive force in Porter’s model. Answer: True LG: 1/LL: 1 Page: 32 AG: 13 Level of Learning 2 (Understands concepts and principles) 1.7. The closer a product is to a commodity the more intense the rivalry in the industry. Answer: True LG: 1/LL: 2 Page: 33 AG: 13 Rationale: Intense rivalry between incumbents is a threat that reduces the profits of established enterprises. A number of different factors determine the intensity of rivalry in an industry: the nature of the product, demand and supply conditions, the cost structure of firms, and the competitive structure of the industry. Hill & McShane, Management, First Edition 45
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1.8. When firms in an industry have high fixed costs and low demand there is likely to be intense rivalry and lower profits. Answer: True LG: 1/LL: 2 Page: 35 AG: 13 Rationale: Fixed costs are those that must be borne before a firm makes a single sale. They require significant capital investments. In industries where the fixed costs of production are high, if sales volume is low, firms cannot cover their fixed costs and will not be profitable. This creates an incentive for firms to cut their prices and increase promotion spending to raise sales volume, thereby covering fixed costs. When too many companies are cutting prices and raising promotion spending, the result can be intense competition and lower profits. 1.9. Firms in the soft drink industry are interdependent. Answer: True LG: 1/LL: 2 Page: 36 - 37 AG: 13 Rationale: The soft drink industry is a consolidated industry dominated by a few large companies. In consolidated industries firms are interdependent because one firm’s competitive actions or moves directly affect the market share of its rivals and thus their profitability. 1.10. Demand for video game consoles is dependent on complementors.
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