While Joseph Donovan, CFA, was interviewing Gene Hickman, the CEO of Hickman Supply, Hickman made the following comments on the auto supply industry: Auto manufacturers are relying on Tier 1 suppliers for more and more sub-assembly work and quality control and testing. The additional subassembly work facilitates specialization among suppliers and allows them to resell their expertise to other auto manufacturers. The additional subassembly work requires additional capital investment and risk taking by the suppliers. Given these statements, Donovan 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. 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. Is it just me or is this a terribly worded question? Where in the question does it talk about negotiation for lower prices? If statement 1 attracts more competitors, statement 3 should too.
no i got A. I think the answer if poorly worded though. you have to look at it from the point of view of the auto supply industry. statement 1 is saying that demand has increased for the auto supply industry - it says nothing about barriers to entry in the industry.
The explanation is worthless. Statement 1 is saying the power of suppliers is increasing. But the question is looking for what makes the barrier to entry higher. It will be harder for new entrants to specialize since they don’t know anything, a knowledge block. Statement 2 since it will now take more capital to get in the business, effectively blocking those pee-ons without enough cash.