IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 421:

  What is the most likely generic strategic benefit of upstream vertical integration?

  A. It eliminates input cost distortion caused by the bargaining power of a strong customer.

  B. The supplier has returns exceeding the opportunity cost of capital.

  C. It eliminates the sales price distortion caused by the bargaining power of a strong supplier.

  D. The customer has returns lower than the firm's opportunity cost of capital.

  Correct Answer: B

  Integration benefits include offsetting the bargaining power of strong suppliers and customers. If such parties have returns greater than the firm's opportunity cost of capital, the firm benefits even if no other advantages accrue from integration.

• Question 422:

  The most likely generic benefit of vertical integration is:

  A. Lowering entry barriers.

  B. Increasing demand.

  C. Avoiding market transactions.

  D. Lowering mobility barriers.

  Correct Answer: C

  Economies of vertical integration result from avoiding some market transactions. Transaction costs of dealing with outside parties are greater than those of dealing with inside parties.

• Question 423:

  A firm has become vertically integrated by acquiring a supplier. However, throughput of thesupplier is greater than the firm's needs. Accordingly, the firm most likely has acquired:

  A. A capability less than the efficient scale.

  B. An efficient capability that provides excess output.

  C. An efficient capability that creates excess demand.

  D. An efficient capability that does not achieve economies of scale.

  Correct Answer: B

  Upstream (backward) or downstream (forward) integration is the acquisition of a capability that otherwise would be performed by external parties that are suppliers or customers, respectively, of the firm. Whether integration should occur depends on the firm's volume of transactions with the external parties (throughput) and the magnitude of the capability required to achieve necessary economies of scale. If the integrating firm's need is for a capability less than the efficient scale, one of its options is to acquire a capability with a costinefficient scale. The other option is to acquire an efficient capability that provides excess output (in the upstream case) or creates excess demand (from, for example, a distribution capability in the downstream case). This option will require the integrated firm to sell or buy in the open market. Thus, the second option carries the risk of having to deal with competitors.

• Question 424:

  Vertical integration is the acquisition of:

  A. A supplier or a distributor.

  B. A supplier but not a distributor.

  C. A distributor but not a supplier.

  D. A competitor.

  Correct Answer: A

  Vertical integration combines within a firm production, distribution, selling, or other separate economic processes needed to deliver a product or service to a customer. All such processes could in principle be performed through market transactions with outside firms. However, vertical integration uses internal or administrative transactions for these purposes in the expectation they will increase efficiency or decrease costs and risks.

• Question 425:

  Forward downstream integration most likely:

  A. Allows the firm to protect its proprietary knowledge from suppliers.

  B. Implies that the firm can fully support an efficient subunit but has additional needs to be met in the market.

  C. May allow the firm's subunit(s) to maintain constant production rates while external parties bear the risk of fluctuations.

  D. Improves access to information about demand.

  Correct Answer: D

  A strategic advantage of forward integration is that access to market information is improved. A forward subunit (the demand leading stage) controls the amount and mix of demand to besatisfied upstream. At the very least, forward integration improves the timeliness of (1) demand information, (2) production planning, (3) inventory control, and (4) the costs of being under- or over-stocked. It also may provide information about changing tastes, competitors' moves, and the ideal mix of products.

• Question 426:

  The most likely strategic benefit to a firm of upstream integration is:

  A. Avoidance of input cost distortion.

  B. Elimination of a customers' power to obtain an unjustifiably low price.

  C. Assurance of demand.

  D. An increase of incentives.

  Correct Answer: A

  Integration benefits include offsetting the bargaining power of strong suppliers and customers. If such parties have returns greater than the opportunity cost of capital, the firm benefits even if no other advantages accrue from integration. Thus, upstream integration eliminates input cost distortion caused by the supplier's power, and downstream integration eliminates the customer's power to obtain an unjustifiably low price. Moreover, the special costs of dealing with powerful parties will also be eliminated. Upstream integration also has the advantage of disclosing the true cost of the input provided by the powerful supplier. This information helps the firm to adjust its input mix and prices.

• Question 427:

  A firm that wishes to obtain the benefits of vertical integration may acquire a minority common stock interest in a supplier or customer firm. This arrangement is most appropriately described as:

  A. Partial integration.

  B. Tapered integration

  C. Quasi-integration.

  D. Contract integration

  Correct Answer: C

  Quasi-integration is something more than a long-term contract and less than full ownership. It may be achieved by a minority common stock interest, debt guarantees, cooperation in RandD, an exclusive dealing arrangement, etc. Buyer and seller may, as a result, have aspecial community of interest leading to lower costs, smoothing of supply/demand fluctuations, or mitigating against bargaining power. Quasi-integration may avoid commitment to an adjacent business, with its investment and management requirements. But many benefits of full integration may not be achievable in this wav.

• Question 428:

  A vertically integrated organization is best described as one that:

  A. Owns all of its production facilities.

  B. Manufactures the component parts used in its product.

  C. Is departmentalized by product or service.

  D. Fosters very narrow span of control.

  Correct Answer: B

  An organization is vertically integrated if it unites sources of supply, the production of finished goods, and the marketing of the product. In other words, complete vertical integration combines all phases of the production and delivery of products or services.

• Question 429:

  The decision to integrate a firm vertically most likely should be based on:

  A. A balance of economic and administrative factors.

  B. Strategic economic issues.

  C. Investment required.

  D. The effect of the acquisition on costs.

  Correct Answer: A

  The decision to integrate should consider not only direct economic issues (needed investment and effects on costs), but also broader strategic issues and the potential difficulties of administering a vertically integrated firm. Thus, the extent of integration depends on the balance of economic and administrative benefits and costs. This balance varies with the industry, the firm's position, and whether the firm engages in full integration, tapered (partial) integration, or quasi- integration (use of alliances, not ownership, to achieve the effects of integration).

• Question 430:

  A milk producer company acquires its own dairy farms to supply milk. The growth strategy adopted by the company is:

  A. Horizontal integration.

  B. Vertical integration.

  C. Concentric diversification.

  D. Conglomerate diversification.

  Correct Answer: B

  Vertical integration occurs when a company becomes its own supplier or distributor. It combines within a firm production, distribution, selling, or other separate economic processes needed to deliver a product or service to a customer.