IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 841:

  Firms in a fragmented industry have insignificant market shares and little influence on such matters as market price and total output. A likely economic cause of this fragmentation is the existence of:

  A. A learning curve effect.

  B. Diseconomies of scale.

  C. High entry barriers.

  D. Low exit barriers.

  Correct Answer: B

  Important diseconomies of scale may favor fragmentation. For example, small, flexible firms have an advantage when the following needs are important:quick responses to style changes, the maintenance of low overhead, customization of a diverse product line to the special requirements of particular customers, substantial creative content in the product, individualized personal service, and local contacts and image.

• Question 842:

  According to Michael E Porter, evolutionary processes involving both internal and external factors operate to move an industry from its initial structure to its potential structure. A likely structural effect of the major evolutionary processes is that:

  A. Expansion of industry scale will discourage entry by large firms.

  B. Sellers' industries tend to become less concentrated as customers' industries become more concentrated.

  C. Learning by buyers who become more sophisticated increases product differentiation.

  D. Diffusion of proprietary knowledge will tend to reduce entry barriers.

  Correct Answer: D

  Diffusion of proprietary knowledge may result from reverse engineering (a form of imitation) or another form of competitive intelligence (e.g., that obtained from suppliers, distributors, or customers), expiration of patents, purchase, migration of personnel to new firms, and spinoffs of operating segments. Thus, because barriers created by proprietary knowledge and specialized personnel tend to disappear, new competitors may emerge, and vertical integration becomes more likely. However, if further technological advances are feasible, economies of scale in RandD may create a protective barrier against new competition. The problem of diffusion may be met by creation of a substantial capacity to develop new proprietary knowledge.

• Question 843:

  While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. The manager has asked the auditor for advice about increasing advertising of various products. During which stage of the life cycle would it be appropriate to advertise that the company's product is the lowest price and best quality of all competitors?

  A. Introduction stage.

  B. Growth stage.

  C. Maturity stage.

  D. Decline stage.

  Correct Answer: C

  The maturity stage is the ideal time for advertising lower prices and superior quality because this is the period during a product's life when competition is greatest. Due to the availability of many substitutes, a firm has reasons to set itself apart. Because price and quality are both concerns of customers during the maturity stage, it is an ideal time for the firm to differentiate its product by advertising low prices and higher quality.

• Question 844:

  While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Under such a philosophy, the opportunity for cost reductions would be greatest in which stage of the life cycle?

  A. Introduction stage.

  B. Growth stage.

  C. Maturity stage.

  D. Decline stage.

  Correct Answer: B

  During the growth stage, the opportunity for cost reductions is at its maximum because production volume is increasing at a high rate. Thus, fixed costs are being spread over more units of production, and the benefits of the learning curve are being realized.

• Question 845:

  While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Under such a philosophy, the price charged on a consistent basis for a specific product would probably be lowest during which life cycle stage?

  A. Introduction stage.

  B. Growth stage.

  C. Maturity stage.

  D. Decline stage.

  Correct Answer: C

  During the maturity stage, competition is at its greatest and costs are at their lowest. Moreover, firms are engaged in competitive price-cutting measures, resulting in some of the lowest prices seen during a product's life cycle.

• Question 846:

  At the introduction stage of an innovative product, the profit growth is normally slow due to

  A. Expensive sales promotion.

  B. High competition.

  C. A mass market.

  D. Available alternatives.

  Correct Answer: A

  The introduction stage is characterized by slow sales growth and lack of profits because of the high expenses of promotion and selective distribution to generate awareness of the product and encourage customers to try it. Thus, the per-customer cost is high. Competitors are few, basic versions of the product are produced, and higher-income customers (innovators) are usually targeted. Cost-plus prices are charged. They may initially be high to permit cost recovery when unit sales are low. The strategy is to infiltrate the market, plan for financing to cope with losses, build supplier relations, increase production and marketing efforts, and plan for competition.

• Question 847:

  Ina product's life cycle, the first symptom of the decline stage is a decline in the

  A. Firm's inventory levels.

  B. Product's sales.

  C. Product's production cost.

  D. Product's prices.

  Correct Answer: B

  The sales of most product types and brands eventually decrease permanently. This decline may be slow or rapid. This first symptom of the decline stage of a product's life cycle triggers such other effects as price cutting, narrowing of the product line, and reduction in promotion budgets.

• Question 848:

  During the growthstage of a product's life cycle:

  A. The quality of products is poor.

  B. New product models and features are introduced.

  C. There is little difference between competing products.

  D. The quality of the products becomes more variable and products are less differentiated.

  Correct Answer: B

  In the growth stage, sales and profits increase rapidly, cost per customer decreases, customers are early adopters, new competitors enter an expanding market, new product models and features are introduced, and promotion spending declines or remains stable. The firm enters new market segments and distribution channels and attempts to build brand loyalty and achieve the maximum share of the market. Thus, prices are set to penetrate the market, distribution channels are extended, and the mass market is targeted through advertising. The strategy is to advance by these means and by achieving economies of productive scale.

• Question 849:

  Of the major processes affecting the evolution of an industry, which one affects rivalry, entry, expansion, and supply?

  A. Long-run changes in the industry growth rate.

  B. Changes in input costs.

  C. Structural changes in suppliers' and customers' industries.

  D. Government policies.

  Correct Answer: A

  Long-run changes in the industry growth rate affect rivalry, entry, expansion, and supply. These changes occur because of changes in five external factors:demographic traits (such as consumer ages and income levels), trends in needs of buyers (caused by changes in regulation, tastes,lifestyles), relative positions of substitute and complementary products, sales to new customers (market penetration), and product innovation, an internal factor, alters the industry's position regarding the external factors.

• Question 850:

  Which type of market structure is most apt to demonstrate price leadership by a major firm in the industry?

  A. Pure competition.

  B. Monopoly.

  C. Monopolistic competition.

  D. Oligopoly.

  Correct Answer: D

  Price leadership is typical in oligopolistic industries. Under price leadership, price changes are announced by a major firm in the industry. Once the leader has spoken, everyone else in the industry matches the price charged by the leader.