After an analyst has gained an understanding of a company's external environment, he/she can start company analysis. This includes analysis of the company's financial position, products and/or services, and its competitive strategy. The analyst should try to determine if the strategy is primarily defensive or offensive and how the company intends to implement the strategy.

A firm can pursue one of the two basic types of competitive strategies: low cost or differentiation. To achieve abnormal profitability, a company should either incur low costs in its production process, or receive premium-to-average market price based on its products' differences preferential to customers. High profits will be possible only if the company with a cost advantage can sell its products at high-enough prices and if the company with a differentiation advantage can keep the costs of superior products sufficiently low.

A checklist for company analysis includes a through investigation of:

• Corporate profile;
• Industry characteristics;
• Demand for products/services;
• Supply of products/services;
• Pricing; and
• Financial ratio.

Practice Question 1

A firm can pursue the differentiation strategy on the basis of differences in ______.

I. advertising
II. design
III. reputation of producers
IV. material

Correct Answer: I, II, III and IV

Practice Question 2

Predatory pricing is an example of a ______ strategy identified by Porter.

A. low-cost
B. product/service differentiation
C. focus

Correct Answer: A

Practice Question 3

According to Porter, the chief competitive strategies a firm can pursue are ______

I. low cost
II. differentiation
III. focus

A. I and II
B. I and III
C. I, II and III

Correct Answer: A

Practice Question 4

A firm can pursue a differentiation strategy on the basis of ______.

I. its product
II. its method of delivery
III. economies of scale
IV. its production process
V. its marketing approach
VI. charging a higher price while attempting to retain cost parity with its competitors

A. I, II, V, VI
B. I, II, III, V, VI
C. All of them

Correct Answer: A

Practice Question 5

Which statement is false?

A. Industries with high barriers to entry can still be very competitive.
B. Many cyclical industries produce durable, commodity-like goods such as raw materials, cars, chemicals, construction, paper, steel, and heavy equipment.
C. Company analysis takes place before the analyst has gained an understanding of the company's external environment.

Correct Answer: C

A is true: high barriers to entry don't automatically lead to good pricing power.

B is true: given the durable nature of the goods, such purchases often get postponed in poor economic conditions, but sell especially well in good economic conditions.

C is false; it should take place AFTER ...