Introduction to Industry and Company Analysis: Removal of differentiating features

CFA Level I Corporate Finance
#1

Hi all,

Reading 40, question 20:

If the technology for an industry involves high fixed capital investment, then
one way to seek higher profit growth is by pursuing:
A economies of scale.
B diseconomies of scale.
C removal of features that differentiate the product or service provided.

Correct answer is A and I get the sense behind it. However, what is wrong about C? If we take a look at e.g. the automotive industry, industrial players are attempted to create a basic car model on which further features are built, so that the production capacities are also sufficient for future models due to the high investment amounts (this is why a lot of BMW, Mercedes etc. series have the same core model). So, in my opinion, removal of differentiating features (e.g. using one basic car model and not many in order to allow a fit for production capacities) can improve profit?

Thanks and Cheers

#2

I believe that they mean features that distinguish your product from your competitors’ products, not features that distinguish one of your products from another of your products.

If you remove all distinguishing features, you’re producing and selling a commodity, which makes you a price taker. Why would you enter an industry that requires a large fixed capital investment so that you can earn zero economic profit?

#3

Better late than never: Thank you very much!