This question comes from Schweser’s QBank (slightly reformatted). Gene Hulk, the CEO of Hulkman Supply, made the following comments on the auto supply industry: 1) Auto manufacturers are relying on Tier 1 suppliers for more and more sub-assembly work and quality control and testing. 2) The additional subassembly work facilitates specialization among suppliers and allows them to resell their expertise to other auto manufacturers. 3) The additional subassembly work requires additional capital investment and risk taking by the suppliers. Given these statements, a Level 2 candidate in the CFA program from Analyst Forum is most likely to conclude that barriers to entry to the auto supply industry have increased due to: A) Statements 2 and 3 only. B) Statements 1 and 2 only. C) Statements 1 and 3 only. The answer is below … ================ Your answer: C was incorrect. The correct answer was A) Statements 2 and 3 only. Based on the Porter model, increased specialization and an increase in capital investment may each act to increase barriers to entry. The fact that auto manufacturers are relying more and more on their suppliers may be interpreted as an industry dynamic that would attract more competition. Finally, the negotiation for lower prices by auto manufacturers suggests that suppliers are losing some bargaining power. ====================== Can someone help me understand how does specialization add to barriers to entry? This seems and sounds simple enough, but I’m having a hard time understanding the underlying reasoning behind this. Thanks.
These questions are always crappy… 3 - talked of investment - which is barrier to entry. between 2 and 1 I went with 1… But after reading the answer - and it is perfect 20/20 hindsight - specialization in the field means a lot of the suppliers are tied in/married to the auto manufacturers for whom they have built up expertise for. So if someone else wants to come into the auto manufacturing industry new, and tries to use these suppliers - they would not be able to as easily unless they themselves built up the same kind of technology and infrastructure. so essentially making a supplier of yours build up specialization creates a barrier to entry for you…
The question asks for barriers of entry to the auto supply industry and specialization is one of them. I am not sure if thats go to do anything with barriers to the auto industry.
Its easier to enter a market where the product/service is generic and non-differentiated. Specialization is a code word for a high-tech, difficult to imitate product (although it is still possible to be specialized without using cutting edge tech). Think of it this way, you are trying to enter the labor market; your barrier to becoming a NASA scientist is much higher than your barrier to becoming a cashier due to the specialized nature of the former’s work.
Thanks folks, thinking of it from a human capital perspective makes sense … but I did not think of putting on that hat. This stuff seems so simple at first, yet, can get soooo involved when reasoning through it.
clama Wrote: ------------------------------------------------------- > This stuff seems so simple at first, yet, can get > soooo involved when reasoning through it. Welcome to L2.
yeap, been there … done that.
great qn and answers
Nirjraina’s response is spot on, think about having a choice to enter into either the sale of salt or high precision mass spectrometers. Which one do you think will be harder to enter as a newcomer?