SELF TEST #1: Defining the Business

Test #1:

Use the descriptions under the "What" section of the Basic Strategy Guide Step 1 to determine whether the following are different businesses: cell phone service, internet telephone service, local telephone connections and long distance phone service.

Answer:

In the mid-2000's these were four different businesses.

In cell phones, the product uses a different infrastructure from the other products. The competition is different from the other products. And customers purchase cell phone service primarily for access while moving, which is a different buying criteria and application than the other products.

Internet calling is a second business. Internet phone service uses different assets and infrastructure than the other services. The competition varies from that of cell phones and land-lines. Customers use this product primarily to get a low price for telecommunications.

The long distance and local telephone services are close to the same businesses, but still different. Long distance uses a different set of assets and infrastructure than does the land-line local business. Customers purchase long distance service primarily on the basis of price in the mid-2000's. Competition varies from one geographic market to another.

The local and long distance services were quickly converging into one business as competitors acquire one another. Eventually cell phone service and internet services may also converge into one business with local and long distance, but these were separate markets in the mid-2000's.

Test #2:

Use the descriptions under the "What" section of the Basic Strategy Guide Step 1 to determine whether the following are different businesses: Online brokerage, regular broker-assisted stock purchases and sales, money managers managing a stock portfolio and mutual funds.

Answer:

We will use regular brokerage as the basis of comparison. Online brokerage is a separate business from the regular brokerage business. The products of online brokerages use a different set of assets than those of the regular brokers. The competitors in the industry are different than those in standard brokerage. And the customers use the product for their own money management and research rather than for advised research.

The money management business is a different business than standard brokerage. The money management product has considerably more value-added and therefore uses a different set of assets and infrastructure. The competitors are different than those in the standard brokerage business. Customers rely on these money managers for all decisions other than the decision to use the money manager. The money management business is different because all three aspects of the business vary from that of the standard brokerage business.

The mutual fund industry also is a different business than standard brokerage. The products, competitors and customer applications all vary from that of the standard brokerage business.

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