IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 821:

  A firm is most likely to leave a declining industry because

  A. The remaining pockets of demand include price-insensitive buyers.

  B. It is the only part of a vertically integrated business that is affected.

  C. Buyers have high switching costs.

  D. Mobility barriers are high.

  Correct Answer: B

  Vertical integration of a business may require exit of the entire chain when the reasons for decline affect all its parts. However, when only one part of the vertically integrated business is in a declining industry, integration is an argument for exit of the affected part. Divestiture prevents the weak link from harming the entire chain.

• Question 822:

  Which of the following is not characteristic of a mature industry environment?

  A. Consolidation.

  B. Competitive interdependence.

  C. Falling demand.

  D. Strategic focus on deterring entry of new competitors into the marketplace.

  Correct Answer: C

  Falling demand is characteristic of declining industries. These industries have sustained a permanent decrease in unit sales over the long run.

• Question 823:

  A firm in a declining industry ordinarily adopts one of four strategies. A firm that follows a:

  A. Quick divestment strategy should have divested during the maturity phase.

  B. Leadership strategy may assume that success will enable the firm to subsequently pursue a harvest strategy.

  C. Harvest strategy seeks a pocket of stable demand.

  D. Niche strategy is engaged in a gradual liquidation.

  Correct Answer: B

  A leadership strategy is pursued by a firm that believes it can achieve market share gains to become the dominant firm. An assumption is that additional investment can be recovered. A second assumption is that success will put the firm in a better position to hold its ground or subsequently to follow a harvest strategy. This strategy may entail aggressive pricing, marketing, or other investments that raise the stakes for competitors; reducing competitors' exit barriers by acquisitions of their capacity or products, assuming their contracts, and producing spare parts and generic versions of goods for them; demonstrations of strength and resolve to remain in the industry; and publicizing accurate data about the reality of future decline so as to dispel competitors' uncertainty.

• Question 824:

  Industry structure and competition during the decline phase may result in intense and destructive competition. Which factor is most likely to contribute to this condition?

  A. Firms do not expect demand to rebound.

  B. The decline is rapid.

  C. Attractive substitutes are not available.

  D. Specialized assets used in the industry have low liquidation values.

  Correct Answer: D

  High exit barriers may restrain firms from leaving the industry even though their returns are poor. For example, specialized assets and inventory in a declining industry may have a low liquidation value. Few purchasers who wish to operate in the same industry may be available. Durable assets may have a carrying amount far greater than the liquidation value. Hence, liquidation may result in a loss that the firm may not wish to recognize. Furthermore, a low liquidation value means that the future discounted cash flows from remaining in the industry may exceed the opportunity cost of the capital invested in the declining industry. Thus, the returns from the proceeds of liquidation may be less than the returns from keeping those assets in the business.

• Question 825:

  Forecasting early and late markets is necessary to shape product development and marketing efforts and to predict structural evolution of an industry. Which factor is the most significant in obtaining customer acceptance of a new industry's product or service?

  A. High switching costs.

  B. Required regulatory approval.

  C. High cost of obsolescence.

  D. A performance rather than a cost advantage.

  Correct Answer: D

  The nature of the benefit is the most significant factor. At one extreme, the benefit may consist of a performance advantage unattainable by other methods. At the other extreme, the benefit may be a pure cost advantage. Ordinarily, early markets purchase a product because it offers a performance advantage. Early markets tend to be suspicious of a product offering a cost advantage.

• Question 826:

  Timing of entry into an emerging industry is a critical choice. Pioneering firms face high risk but low barriers. Which of the following is not a factor that favors early entry?

  A. The bases of competition and market segments will change.

  B. The learning curve advantage will persist.

  C. Customer loyalty will be high.

  D. Cost advantages can be secured.

  Correct Answer: A

  If the bases of competition and market segments will change significantly, an early entrant may lose the advantage obtained by being an early entrant. Other factors not favoring early entry include the following:

  (1) costs of opening the market are high and the benefits cannot be retained by the firm, (2) early competition will be expensive and larger and stronger competitors will emerge later, and (3) early products and processes will become obsolete.

• Question 827:

  Which of the following is not a limit on emerging industry development?

  A. Raw materials and components.

  B. Subsidies.

  C. Product quality.

  D. Regulatory approval.

  Correct Answer: B

  Subsidies are a structural characteristic of an emerging market. If a subsidy is given by the government or other party, it usually assists the growth of the new industry instead of hindering it. Subsidies tend to focus on radically new technology or technology in which societal concern is strong.

• Question 828:

  Regulatory approval is most likely to be hardest to obtain in:

  A. Mature industries.

  B. Fragmented industries.

  C. Emerging industries.

  D. Declining industries.

  Correct Answer: C

  Regulatory approval for an emerging industry may be hard to obtain, especially if customer needs are already served by an established regulated industry. However, favorable government policy may jump-start an industry, for example, when use of a safety productbecomes mandatory. Moreover, further growth of an industry may be stunted when it attracts first-time regulation.

• Question 829:

  A firm considering entry into an emerging industry must be aware of many strategic factors. Thus, the firm must anticipate that:

  A. Early mobility barriers are likely to persist.

  B. Early commitment to suppliers is a strategic trap.

  C. The high cost of opening the market favor early entry.

  D. The nature of entrants may change.

  Correct Answer: D

  The nature of entrants may change to include larger firms attracted by the proven and less risky industry. Firms must predict when such entry is likely given existing and probable future barriers and the costs of surmounting them. Firms also need to predict how new entrants will compete, e.g., on the basis of marketing power or economies of scale. Furthermore, new entrants may emerge through vertical integration.

• Question 830:

  A structural characteristic of an emerging industry is:

  A. Strategic uncertainty.

  B. Customers are sophisticated.

  C. Technological uncertainty has been overcome.

  D. Industry development is unlimited.

  Correct Answer: A

  Strategic uncertainty arises because effective strategies have not yet been identified. Hence, firms are experimenting with product features, production methods, marketing approaches, etc. Moreover, competitive intelligence is necessarily poor because competitors have not been identified and industry sales and other data are not available.