CA Inter P6 · Chapter 11
Strategic Analysis: External Environment MCQs with Answers
11 multiple-choice questions on Strategic Analysis: External Environment for CA Inter P6 Financial Management and Strategic Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A new law requires all e-commerce companies to store customers' personal data within the country and obtain explicit consent before using it. In a PESTLE analysis, this is mainly classified as a:
- A) Technological factor
- B) Environmental factor
- C) Social factor
- D) Legal factor
Show answer & explanation
Answer: D) Legal factor
PESTLE groups macro-environmental influences into Political, Economic, Social, Technological, Legal and Environmental factors. A statutory requirement on data storage and consent is a legal factor. The technology needed to comply is a consequence, but the driver is the law.
Question 2
An ageing population and the shift towards nuclear families, which change demand for healthcare and home services, are examples of which factor in the macro environment?
- A) Social (socio-cultural) factor
- B) Political factor
- C) Legal factor
- D) Economic factor
Show answer & explanation
Answer: A) Social (socio-cultural) factor
Demographic changes such as age profile, family structure and lifestyle fall under social or socio-cultural factors. They shape what customers want and how they buy. Economic factors cover items such as income, inflation and interest rates.
Question 3
In Porter's five forces model, the threat of new entrants into an industry is LOW when:
- A) Distribution channels are freely available to all
- B) Incumbents enjoy large economies of scale and strong brand loyalty, and capital requirements are high
- C) Incumbents have no cost advantages over potential entrants
- D) Products are undifferentiated and switching costs are negligible
Show answer & explanation
Answer: B) Incumbents enjoy large economies of scale and strong brand loyalty, and capital requirements are high
Entry barriers protect incumbents. High barriers include economies of scale, product differentiation and brand loyalty, large capital requirements, switching costs, restricted access to distribution channels and government policy. When barriers are high, the threat of entry is low. The other options describe low barriers.
Question 4
The bargaining power of suppliers in an industry is likely to be HIGH when:
- A) There are many suppliers of a standard input
- B) The buying industry is the suppliers' most important customer
- C) There are few suppliers, their input is critical and differentiated, and switching to another supplier is costly
- D) Buyers can easily integrate backwards and make the input themselves
Show answer & explanation
Answer: C) There are few suppliers, their input is critical and differentiated, and switching to another supplier is costly
Suppliers have strong power when they are concentrated, their product is unique or important to the buyer's quality, substitutes are unavailable and switching costs are high. Supplier power is weaker when the industry buying from them is an important customer or can credibly integrate backwards.
Question 5
Large retail chains buying standardised packaged rice from many small millers are likely to have high bargaining power mainly because:
- A) The millers are few and highly concentrated
- B) Rice is a highly differentiated product with strong brands
- C) They buy large volumes of an undifferentiated product and can switch between millers at little cost
- D) The retail chains face high switching costs
Show answer & explanation
Answer: C) They buy large volumes of an undifferentiated product and can switch between millers at little cost
Buyer power is high when buyers are concentrated or buy large volumes, the product is standard, switching costs are low and buyers can threaten backward integration. Many small millers selling an undifferentiated product to a few large chains fits this pattern.
Question 6
For domestic airlines, the growing use of high-quality video conferencing by corporate clients instead of travelling to meetings represents:
- A) Rivalry among existing competitors
- B) The bargaining power of suppliers
- C) The threat of new entrants
- D) The threat of substitutes
Show answer & explanation
Answer: D) The threat of substitutes
Substitutes are products from outside the industry that meet the same customer need in a different way. Video conferencing meets the need for business meetings without air travel, so it caps the prices airlines can charge for business travel. It does not involve a new airline entering the market.
Question 7
Rivalry among existing competitors tends to be MOST intense when:
- A) The industry is growing rapidly and there is room for everyone
- B) Industry growth is slow, competitors are of similar size, fixed costs are high and exit barriers are high
- C) Products are highly differentiated and customers are very loyal
- D) One firm clearly dominates the market and the rest are small niche players
Show answer & explanation
Answer: B) Industry growth is slow, competitors are of similar size, fixed costs are high and exit barriers are high
Rivalry intensifies when firms must fight for market share because growth is slow, when many equally balanced competitors exist, when high fixed costs push firms to fill capacity by cutting prices, and when high exit barriers keep weak firms in the industry. Rapid growth, a clear leader and strong differentiation all tend to reduce rivalry.
Question 8
A strategic group map of an industry is used to:
- A) Group together firms that follow similar competitive approaches and occupy similar market positions, to identify closest rivals
- B) Rank employees according to their strategic skills
- C) Show the reporting relationships within a single firm
- D) Calculate the market share of each product in the firm's portfolio
Show answer & explanation
Answer: A) Group together firms that follow similar competitive approaches and occupy similar market positions, to identify closest rivals
A strategic group is a set of firms in an industry that follow similar strategies, such as similar price-quality ranges, distribution channels or product breadth. Plotting firms on two such dimensions shows who competes most directly with whom and where the competitive gaps are.
Question 9
Key Success Factors (KSFs) of an industry are best described as:
- A) The product attributes, competencies and resources that most affect a firm's ability to succeed competitively in that industry
- B) Factors unique to one firm that no competitor can ever copy
- C) The financial ratios that every company must disclose by law
- D) The personal goals of the chief executive officer
Show answer & explanation
Answer: A) The product attributes, competencies and resources that most affect a firm's ability to succeed competitively in that industry
KSFs are the competitive factors that matter most for success in a particular industry, for example low-cost distribution, product innovation or brand image. All firms in the industry need to pay attention to them. They are industry-specific, unlike a single firm's own core competencies.
Question 10
Which of the following is part of a firm's micro (task) environment rather than its macro environment?
- A) Demographic trends in the population
- B) The rate of inflation in the economy
- C) Changes in government trade policy
- D) Its customers, suppliers and competitors
Show answer & explanation
Answer: D) Its customers, suppliers and competitors
The micro environment consists of actors close to the firm that directly affect its ability to serve customers: customers, suppliers, competitors, intermediaries and the public. The macro environment consists of broad forces such as economic, demographic, political and technological trends that affect all firms.
Question 11
Shakti Batteries notices that electric two-wheelers are spreading fast, battery chemistry is changing quickly and government incentives are shifting demand away from lead-acid batteries. In industry and competitive analysis, these developments are best described as:
- A) Internal weaknesses of Shakti Batteries
- B) The bargaining power of suppliers
- C) Driving forces that are changing the industry's structure and competitive conditions
- D) Key success factors that guarantee profitability
Show answer & explanation
Answer: C) Driving forces that are changing the industry's structure and competitive conditions
Driving forces are the major underlying causes of change in an industry, such as changes in long-term growth rate, product and process innovation, and regulatory influences. They change the industry's competitive structure, so firms must identify them and adjust their strategies. They are external, not internal weaknesses.