19. a. Stock prices are one of the leading indicators. One possible explanation is that stock prices anticipate future
interest rates, corporate earnings, and dividends. Another possible explanation is that stock prices react to changes
in the other leading economic indicators, such as changes in the money supply or the spread between long-term and
short-term interest rates.
20. a. Industrial production is a coincident indicator; the others are leading.
21. b. If historical returns are used, the arithmetic and geometric means of returns are available. The geometric
mean is preferred for multiperiod horizons to observe long-term trends. An alternative to the equity risk premium is
to use a moving average of recent historical market returns. This will reveal a low expected equity risk premium
when times have been bad, which is contrary to investor expectations. When using historical data, there is a trade-
off between long and short time spans. Short time spans are helpful to reduce the impact of regime changes. Long
time spans provide better statistical data that are less sensitive.
22. a. Foreign exchange rates can significantly affect the competitiveness and profitability for a given industry. For
industries that derive a significant proportion of sales via exports, an appreciating currency is usually bad news
because it makes the industry less competitive overseas. Here, the appreciating French currency makes French
imports more expensive in England.
23. Determinants of buyer power include buyer concentration, buyer volume, buyer information, available
substitutes, switching costs, brand identity, and product differences. Point 1 addresses available substitutes, Point 2
addresses buyer information, and Point 4 addresses buyer volume and buyer concentration. Point 3, which addresses
the number of competitors in the industry, and Point 5, new entrants, may be factual statements but do not support
the conclusion that consumers have strong bargaining power.
24. a. Product differentiation can be based on the product itself, the method of delivery, or the marketing approach.
25. A firm with a strategic planning process not guided by its generic competitive strategy usually makes one or
more of the following mistakes:
1. The strategic plan is a list of unrelated action items that do not lead to a sustainable competitive advantage.
2. Price and cost forecasts are based on current market conditions and fail to take into account how industry
structure will influence future long-term industry profitability.
3. Business units are placed into categories such as build, hold, and harvest; with businesses failing to realize that
these are not business strategies, but rather the means to achieve the strategy.
4. The firm focuses on market share as a measure of competitive position, failing to realize that market share is the
result and not the cause of a sustainable competitive position. Smith’s observations 2 and 3 describe two of these