IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 831:

  Strategic choices in an emerging industry are inherently subject to great uncertainty and risk with regard to competitors, industry structure, and competitive rules. Accordingly, a firm considering entry into an emerging industry:

  A. Has little need to be concerned with industry cooperation.

  B. Is least likely to be able to shape the industry structure at this stage.

  C. May enjoy such benefits of pioneering as experience advantages and early commitment to suppliers.

  D. Must be prepared for responding vigorously to competitors' moves.

  Correct Answer: C

  Timing of entry is a critical choice. Pioneering firms face high risk but low barriers and may earn high returns. The following are factors favoring early entry:pioneering improves the firm's reputation, the learning curve (experience) advantage is important and will persist, customer loyalty will be high, and cost advantages (through early commitment to suppliers or distributors) can be secured.

• Question 832:

  An emerging industry is new or newly formed and is small in size initially. An emerging industry results from innovation, changes in cost structures, new customer needs, or another factor that creates an attractive opportunity for selling a product or service. Which of the following is a structural characteristic of an emerging industry?

  A. A long time horizon for product development.

  B. Low initial costs and a shallow learning curve.

  C. Mobility barriers include economies of scale and brand identification.

  D. The presence of embryonic companies and spinoffs.

  Correct Answer: D

  Embryonic companies (firms newly formed and not new units of established entities) are numerous in the emerging phase of industry evolution. Entry is not discouraged by the presence of economies of scale or strategic certainty. Spin-offs from existing firms also are common. Given the strategic uncertainties and the lure of equity interests, employees of these firms may have the incentive, and be well-placed, to create new firms. Their motive is to exploit ideas that may not have received a favorable reception by their former employers.

• Question 833:

  What is the last step in Porter's framework for developing a competitive strategy in a fragmented industry?

  A. Create a full list of reasons for fragmentation.

  B. Select the best strategy for operating in a fragmented environment.

  C. Evaluate whether a new structure will yield acceptable returns and what position the firm should occupy.

  D. Determine the industry's structure.

  Correct Answer: B

  The framework's initial steps determine the causes of fragmentation, analyze whether the causes can be overcome, and determine the best strategy if fragmentation can be overcome. The last step is determining the best strategy if fragmentation cannot be overcome.

• Question 834:

  Coping with fragmentation requires strategic positioning. Which strategic position is a focus strategy that enhances bargaining power with suppliers and increases differentiation?

  A. Backward integration.

  B. Tightly managed decentralization.

  C. Specialization by product type or segment.

  D. Developing formula facilities.

  Correct Answer: C

  Specialization by product type or segment is a focus strategy that is used to cope with fragmentation. This strategy may enhance bargaining power with suppliers and increase differentiation because of perceived expertise and image. The downside is reduced growth opportunities.

• Question 835:

  A fragmented industry is most likely to:

  A. Have substantial economies of scale.

  B. Have low transportation costs.

  C. Be characterized by suppliers with little bargaining power.

  D. Approximate pure competition.

  Correct Answer: D

  According to Michael E. Porter, individual firms in a fragmented industry have insignificant market shares and little influence on industry outcomes. Examples are retailing, agriculture, and creative enterprises. Thus, the situation approximates what economists call pure competition. Moreover, the industry has many small- or medium-sized firms with no market leader, products may or may not be significantly differentiated, and the technology may or may not be sophisticated.

• Question 836:

  A firm considering entry into a fragmented industry may be able to eliminate the factors preventing concentration in which ways?

  I. Recognizing that the industry is "stuck" for noneconomic reasons.

  II. Adding value to products that cannot be significantly differentiated.

  III. Specialization by customer type.

  IV. Acquisitions of local firms.

  A. I and II only.

  B. I and IV only.

  C. II, III, and IV only.

  D. I, II, Ill, and IV.

  Correct Answer: B

  Overcoming fragmentation has significant strategic payoffs given that entry is not costly and competitors are weak. If the factor(s) preventing consolidation can be eliminated, industry structure will change. For example, industries may be "stuck" in a fragmented state for reasons other than underlying economic factors. Firms in the industry lack the resources, skills, awareness, or ambition to make the strategic moves needed for consolidation. Outside firms do not recognize the opportunity offered by an industry 皊 tuck" in a fragmented state, for example, because it is new, small, or obscure. Also, acquisitions may enable a firm to expand when competing with local firms is difficult because of their contacts or image. However, adding value to products that cannot be significantly differentiated and specialization by customer type are methods of coping with, not overcoming, fragmentation.

• Question 837:

  A firm in a fragmented industry should most likely take what action to avoid a strategic trap?

  A. Seek dominance to overcome fragmentation.

  B. Assume that competitors have similar costs.

  C. Avoid centralization of the organizational structure.

  D. Invest heavily to respond quickly to new product demand.

  Correct Answer: C

  Over centralization of the organizational structure is often a mistake. In the intense competition of a fragmented industry, quick response times, local contacts, personal service, and tight operating control are essential.

• Question 838:

  A firm in a fragmented industry must position itself by adopting a competitive strategy appropriate to the industry. 1hich of the following is most clearly a focus strategy?

  A. Specialization by product type.

  B. Backward integration.

  C. An emphasis on low overhead and low payroll.

  D. Development of formula facilities.

  Correct Answer: A

  A focus strategy is directed at a buyer group, segment of the product line, or geographic area. Thus, the strategic target is narrow compared with an industry wide strategy designed to achieve cost leadership or product differentiation. Specialization by product type or segment is a focus strategy. This focus may enhance bargaining power with suppliers. It may also increase differentiation because of the perceived expertise and image. The downside is reduced growth opportunities.

• Question 839:

  In which of the following industry environments would an internal auditor be most likely to recommend strategies such as franchising and horizontal mergers?

  A. Emerging industries.

  B. Declining industries.

  C. Fragmented industries.

  D. Mature industries.

  Correct Answer: C

  Strategies such as chaining, franchising, and horizontal mergers are commonly used in fragmented industries. Overcoming fragmentation has significant strategic payoffs given that entry is not costly and competitors are weak. If the factor(s) preventing consolidation can be eliminated, industry structure will change. Isolating factors responsible for fragmentation has been achieved in, for example, the fast food industry. The need to have numerous local operations under tight control and near customers has been isolated or neutralized by franchising to local owners. The franchisor provides national advertising, centralized purchasing, and other services, which result in economies of scale and industry consolidation. In effect, the service or production function is separated from the rest of the business. Also, acquisitions (horizontal mergers) that enable a firm to expand when competing with local firms might be difficult because of their contacts and image.

• Question 840:

  The opportunity for franchising comes from the ability to:

  A. Develop products.

  B. Differentiate products.

  C. Standardize products.

  D. Diversify products.

  Correct Answer: C

  Standardizing products means to maintain the same product or to standardize the production, operations, and facilities in different locations or markets. Franchises all use standardized products to reduce costs.