IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 401:

  What governmental factor most likely will lead to overbuilding in a global industry?

  A. Tax incentives are given to local subsidiaries of foreign firms.

  B. The government favors an indigenous industry that has a small minimum efficient scale.

  C. Environmental regulations are imposed on domestic firms.

  D. Anti-bribery laws impede domestic firms from competing globally.

  Correct Answer: A

  Governmental factors may lead to overbuilding. For example, tax incentives may promote excess capacity by permitting foreign subsidiaries to pay no tax on earnings retained in the business. A nation also may wish to create an indigenous industry. When the minimum efficient scale is great in relation to world demand, the excess production in the country may contribute to global overcapacity. Furthermore, governmental employment pressures may result in overbuilding to create jobs or avoid job loss.

• Question 402:

  The managerial factor that may lead to overbuilding in an industry is:

  A. Management's belief that the career consequences of overcapacity appear to be more serious than those of under capacity.

  B. Management's production orientation.

  C. Inflation of expectations by industry buzz.

  D. Uncertainty caused by changes in industry structure.

  Correct Answer: B

  Management that is production-oriented may be more likely to overbuild than marketing-or finance-oriented management.

• Question 403:

  The information flow factor that may lead to overbuilding in an industry is:

  A. The desire of firms able to add capacity to improve market share.

  B. The lack of a credible market leader.

  C. Effective market signaling.

  D. Management's expression of optimism to the financial community.

  Correct Answer: D

  The financial community plays a role in overbuilding when analysts criticize firms that have not expanded. Also, management's optimistic comments to the financial community may be taken as aggressive signals by competitors.

• Question 404:

  The competitive factor that may lead to overbuilding in an industry is:

  A. The need of large customers to know that capacity exists to meet their long-term requirements.

  B. A significant first mover advantage.

  C. The advantage held by the capacity leader.

  D. The existence of high entry barriers.

  Correct Answer: B

  First mover advantages may be significant. Thus, shorter lead times for ordering equipment, lower costs, and the ability to exploit an excess of demand over supply may encourage too many firms to expand.

• Question 405:

  Which of the following is a structural factor that may lead to overbuilding in an industry?

  A. The need to add capacity in large increments.

  B. An increase in the minimum efficient scale of production.

  C. An increase in competitive pressure on the suppliers of the firm.

  D. Competitors are not integrated.

  Correct Answer: C

  Suppliers of capital, equipment, materials, etc., face their own competitive pressures. Thus, lower supplier prices, government subsidies, favorable interest rates, and similar incentives may promote expansion by customer industries.

• Question 406:

  A firm most likely will adopt a preemptive capacity expansion strategy when:

  A. Demand uncertainty is low.

  B. Large competitors have signaled their intention to expand.

  C. Excess industry capacity exists.

  D. Cash reserves are low.

  Correct Answer: A

  The extent of uncertainty about future demand is a crucial variable in determining the nature of industry expansion. For example, if uncertainty is great, firms willing to take greater risks because of their large cash resources or strategic stake in the industry will act first. Other firms will await events. When demand uncertainty is low, firms will tend to adopt a strategy of preemption, usually with strong market signals, to forestall competitors' expansion plans. Excess preemption leads to excess industry capacity because firms overestimate their competitive strengths, misunderstand market signals, or fail to accurately assess competitors' intentions.

• Question 407:

  A firm's capacity expansion decision should be based on the understanding that:

  A. Overcapacity in a profitable industry is a short-term problem.

  B. Under capacity in a profitable industry is a long-term problem.

  C. A key forecasting problem is behavior of competitors.

  D. Prices and cash flows must be estimated to predict market shares and industry capacity.

  Correct Answer: C

  Whether to expand capacity is a major strategic decision because of the capital required, the difficulty of forming accurate expectations, and the long time frame of the lead times and the commitment. The key forecasting problems are long-term demand and behavior of competitors. The key strategic issue is avoidance of industry overcapacity. Analysis of competitors determines when each will expand. The difficulty is that forecasting their behavior depends on knowing their expectations. Another difficulty is that each competitor's actions potentially affect all other competitors' actions, with the industry leader being most influential.

• Question 408:

  Which of the following is not a technological factor that may lead to overbuilding?

  A. Long lead times for adding capacity.

  B. Changes in production technology.

  C. The presence of economies of scale.

  D. High exit barriers.

  Correct Answer: D

  The following are technological factors that may lead to overbuilding:

  (1)

  capacity may need to be added in large increments; (2) the presence of economies of scale or a steep learning curve encourages preemption; (3) long lead times for adding capacity increase the risk of competitive inferiority if a firm does not act quickly to raise capacity;

  (4)

  when the minimum efficient scale increases, large plants are becoming more efficient even though demand is not growing:and

  (5)

  changes in production technology result in new construction while old plants remain in operation. High exit barriers are a structural factor that may lead to overbuilding. The effect of high exit barriers is to extend the period of overcapacity.

• Question 409:

  An information flow factor that may lead to industry overcapacity is:

  A. The need to give assurance to large customers.

  B. Stable industry structure.

  C. Presence of tax incentives.

  D. Untrustworthy market signaling.

  Correct Answer: D

  Market signaling may be ineffective because it is no longer regarded as credible. Firms' signals may no longer be trusted as indicators of planned moves, such as expansion, because of new entrants, a period of bitter rivalry, or other reasons. Credible signaling fosters orderly expansion by allowing all parties to plan effectively.

• Question 410:

  The competitive factor that may lead to industry overcapacity is

  A. A favorable interest rate charged by suppliers of capital.

  B. A short lead time for capacity expansion.

  C. The existence of first mover advantages.

  D. Integration of competitors.

  Correct Answer: C

  First mover advantages may be significant. Thus, short lead times for ordering equipment, lower costs, and the ability to exploit an excess of demand over supply may encourage too many firms to expand.