IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 601:

  Which factor increases the threat of entry into an industry?

  A. Economies of scale are significant.

  B. Capital requirements are high.

  C. An industry leader may retaliate against a new entrant.

  D. Exit barriers are low.

  Correct Answer: D

  The most favorable condition for the attractiveness of an industry is the existence of high entry barriers and low exit barriers. When the threat of new entrants is minimal and exit is not difficult, returns are high, and risk is reduced in the event of poor performance. Low entry barriers keep long-term profitability low because new firms can enter the industry, increasing competition and lowering prices and the market shares of existing firms. Exit barriers are reasons for a firm to remain in an industry despite poor (or negative) profits.

• Question 602:

  Michael E Porter's competitive strategies model includes an analysis of the competitive forces that determine the attractiveness of an industry. These forces include:

  I. The stage of the industry life cycle

  II. Threats of, and barriers to, entry

  III. Threat of substitutes

  IV.

  The threat of suppliers' bargaining power

  A.

  I and II only.

  B.

  I and Ill only.

  C.

  II, Ill, and IV only.

  D.

  I, II, Ill, and IV.

  Correct Answer:

  Michael E. Porter, a leader in the field of strategic management, has developed a comprehensive model of the structure of industries and competition. One feature is his analysis of the five competitive forces that determine long-term profitability measured by long-term return on investment. This analysis determines the attractiveness of an industry. The five forces are (1) the degree of rivalry among existing firms; (2) threats of, and barriers to, entry; (3) the threat of substitute products or services; (4) the threat of buyers' bargaining power; and (5) the threat of suppliers' bargaining power.

• Question 603:

  X and Y are substitute products. If the price of product Y increases, the immediate impact on product Xis that its:

  A. Price will increase.

  B. Quantity demanded will increase.

  C. Quantity supplied will increase.

  D. Price, quantity demanded, and supplies will increase.

  Correct Answer: B

  By definition, if two goods are substitutes, the price of one and the demand for the other are directly related. For example, if the price of Y increases, the quantity demanded of X will increase.

• Question 604:

  Which basic force(s) drive(s) industry competition and the ultimate profit potential of the industry?

  I. Threat of new entrants

  II. Bargaining power of suppliers

  III. Favorable access to raw materials and labor

  IV.

  Product differentiation

  A.

  I only.

  B.

  I and II only.

  C.

  Ill and IV.

  D.

  I, II, III, and IV.

  Correct Answer: B

  Threat of new entrants and bargaining power of suppliers are among the five basic forces that drive industry competition and the ultimate profit potential in the industry. This potential is measured in terms of long-term return on invested capital. The other three forces are rivalry among existing firms, threat of substitutes, and threat of buyers' bargaining power.

• Question 605:

  Which of the following is a favorable condition for a firm competing in a profitable, expanding industry?

  A. The firm does not have a strong customer base.

  B. A few suppliers who can restrict supply.

  C. Competitors find it difficult to acquire the firm's customers.

  D. The firm has high costs relative to other firms in the industry.

  Correct Answer: C

  A firm that has successfully differentiated its products through developing a desirable image, better services, cost leadership, the features of the product, or other means is in a favorable competitive position. Competitors find it difficult to acquire the firm's customers, for example, by price cutting. The reason is that the firm's products are perceived to have few substitutes, and brand loyalty is high. Furthermore, barriers to entry are favorable to the firm. These barriers deter competitors from entering the market. Existing firms can increase market share and emphasize cutting costs and increasing value.

• Question 606:

  Which factor most likely encourages entry into an existing market?

  A. Governmental subsidies for new investors.

  B. High product differentiation, principally produced by trademarks.

  C. Knowledge of the industry, with high investments in development. D Low fixed exit costs.

  Correct Answer: A

  Subsidies for new firms lower entry barriers. Thus, new firms may enter the industry and intensify competition. Government policy also may affect competition via regulations that encourage or discourage substitutes or affect costs, that govern competitive behavior, or that limit growth. Government also may be a buyer or supplier.

• Question 607:

  The concurrent action of basic competitive forces as defined by Porter's model determines the

  A. Long-term profitability and the competitive intensity of the industry.

  B. Entrance barriers that potential players must face to get into the industry.

  C. Rivalry inside the industry.

  D. Strategy that a firm should follow to achieve its objectives.

  Correct Answer: A

  Michael E. Porter, a leader in the field of strategic management, has developed a comprehensive model of the structure of industries and competition. One feature is his analysis of the five competitive forces that determine long-term profitability measured by long-term return on investment. This analysis determines the attractiveness of an industry.

• Question 608:

  Which condition does not increase the threat of new competitor entry into the industry?

  A. Strong brand identity.

  B. Existing firms do not enjoy the cost advantages of vertical integration.

  C. Few proprietary product differences.

  D. Low capital requirements.

  Correct Answer: A

  Strong brand identity decreases the threat that new competitors will enter an industry. New competitors have difficulty because potential customers are loyal to established firms in the industry.

• Question 609:

  Which industry factor does not contribute to competitive rivalry?

  A. Price-cutting, large advertising budgets, and frequent introduction of new products.

  B. A firm's growth must come from winning other firms' customers.

  C. High costs of customers switching suppliers.

  D. High fixed costs relative to variable costs.

  Correct Answer: C

  If it is expensive to switch suppliers, customers will be less motivated to respond to competitor advances.

• Question 610:

  A corporation is performing research to determine the feasibility of entering the truck rental industry.The decision to enter the market is most likely to be deterred if:

  A. Buyer switching costs are high.

  B. Buyers view the product as differentiated.

  C. The market is dominated by a small consortium of buyers.

  D. Buyers enjoy large profit margins.

  Correct Answer: C

  When purchasing power is concentrated in a few buyers or when buyers are well organized, their bargaining power is greater. This effect is reinforced when sellers are in a capitalintensive industry, such as trucking.