Industry analysis?

Here is another one from BSAS’07… ==== Which of the following toy industry characteristics would attract new competitors? 1. Toy sales grew by 5% compounded annually over the past 10 years 2. The birth rate is expected to increase by 2% annually for the next 3 years 3. Toy companies historically offer good business diversification 4. Toy companies require minimum investment in marketing studies. A) 1 & 2 only B) 2 & 3 only C) 1, 2 & 3 only D) 1, 2, 3 & 4


What is the ans for this? Tahnks

oau i have no clue I’ll guess D


dehli you have the explanation for this?

I marked D too…they all looked correct. I am having a real tough time with these kinds.

I think 4 will be out since that is a sunk cost.

A. Unless its a conglomerate, otherwise most new entrants wld not be too concerned abt diversification benefits. What economics point is this question testing actually?

4th choice is about sunk cost. 3 had no clue what to do with it … so i would have guessed A



i’m thinking B.

I remember this question. I got it wrong. The answer is A, because companies only enter an industry if the potential to make profits exist. I and II speak to that. III and IV would not enter into the decision on whether to enter the industry. I thought III made sense too, but apparantly BSAS didn’t agree.

A few additional comments on this question: Choices 1 and 2 collectively offer us insight into recent and projected growth in the toy market. The industry has been growing and appears likely to continue for at least a few years, presenting an attractive opportunity for competition. Regarding Choice 3, it’s important to distinguish between the value of diversification from an investor’s perspective, versus diversification from a company’s perspective. The former makes sense and is addressed in the portfolio management and equity analysis sections of LI. However, if we conclude the objective of diversification of company operations is to reduce risks, there may be more efficient solutions like the use of derivatives, insurance, long-term agreements, etc. Moreover, this sort of diversification isn’t necessarily attractive to investors, whose cost is lower to diversify (simply by adjusting their holdings among companies) than for companies to invest in all sorts of disparate types of businesses. This latter point is discussed briefly at LII w/in the context of the good/bad reasons to engage in M&A. Choice 4 doesn’t attract competitors, but it’s important to distinguish this as a barrier-to-entry, rather than a sunk cost. Sunk costs have already occurred and are not recoverable. This minimum investment in marketing studies has not yet occurred and is contingent upon entry into the toy industry. This investment increases the capital required to enter the industry and is therefore a barrier-to-entry, it should be considered by potential competitors in their decision to enter the toy market. Alternatively, an example of a sunk cost would be the analysis undertaken to determine whether entering the toy industry is attractive. At the conclusion of this study, you either enter the toy industry or not, but either way you don’t recover the costs of the study and these costs don’t factor into your decision. So, Choice A looks like the better response here.

I would say A because anything with Choice 3 in it is false. Business diversification is not a property that would attract a competitor to a certain industry. This eliminates choices bcd so we are left with A