IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 871:

  The General Electric (GE) portfolio model for competitive analysis of strategic business units (SBUs)

  should be compared with the Boston Consulting Croup's growth-share matrix.

  The GE model:

  A. Is a matrix with two variables:relative market share and market growth rate.

  B. Calculates an index for each of its two variables.

  C. Considers such factors for business strength as market size, growth rate, and price levels.

  D. Considers such factors for market attractiveness as market share, growth rate, and marketing skills.

  Correct Answer: B

  The GE model is a multifactor portfolio matrix with two variables. Business strength or competitive position (BUS) is on one axis, and market attractiveness (MAT) is on the other. BUS is classified as strong, medium, or weak, and MAT is classified as high, medium, or low. Thus, the matrix in this model is 3 x 3 and has nine cells. SBUs are shown in the matrix as circles. Circle size is directly proportional to the size of the related market, with a shaded portion in the circle that represents the SBU's market share. To measure BUS and MAT, the firm must isolate the multiple factors affecting each, quantify them, and create an index. Factors will vary with each business. The measurements will provide the values on the axes of the matrix.

• Question 872:

  According to the growth-share matrix approach developed by the Boston Consulting Group, a harvest strategy is most likely to be used for SBUs that are

  A. Question marks that may become stars.

  B. Strong cash cows.

  C. Weak cash cows.

  D. Dogs that reduce the firm's profits.

  Correct Answer: C

  Each SBU should have objectives, a strategy should be formulated to achieve those objectives, and a budget should be allocated. A harvest strategy maximizes short- term net cash inflow. Harvesting means zero-budgeting RandD, reducing marketing costs, not replacing facilities, etc. This strategy is used for weak cash cows and possibly question marks and dogs.

• Question 873:

  A strategic business unit (SBU) has a low relative market share (RMS) and a high market growth rate (MGR). According to the portfolio model for competitive analysis (thegrowth sharematrix) created by the Boston Consulting Group, the SBU is considered a

  A. Star.

  B. Question mark.

  C. Cash cow.

  D. Dog.

  Correct Answer: B

• Question 874:

  A firm has a strategic business unit (SBU) that has a low market share in a high growth market. To maintain even this low share of the market requires the firm to commit a significant amount of cash. The firm might successfully adopt a build strategy for this unit if the:

  I. SBU shows a strong potential to grow and obtains a significant share of the market.

  II. Firm can finance its growth.

  III. Firm expects a short-term increase in cash flow.

  IV.

  Firm is willing to forgo short-term earnings.

  A.

  I only.

  B.

  II and Ill only.

  C.

  Ill and IV only.

  D.

  I, II, and IV only.

  Correct Answer: D

  One of the two portfolio models most frequently used for competitive analysis was created by the Boston Consulting Group (BCG). This model, the growth-share matrix, has two variables. The market growth rate (MGR) is on the vertical axis, and the firm's relative market share (RMS) is on the horizontal axis. The growth-share matrix has four quadrants. The firm's SBUs are commonly represented in their appropriate quadrants by circles. The size of a circle is directly proportional to the SBU's sales volume. Question marks (low RMS, high MGR) are weak competitors in high-growth markets. They need large amounts of cash not only to finance growth and keep pace with the market but also to increase RMS, but do poorly in cash generation. If RMS increases significantly, a question mark may become a star. If not, it becomes a dog. A build strategy is necessary for a question mark with the potential to be a star. Consequently, a firm may adopt a build strategy for this type of SBU if it shows a strong potential to grow, if the firm is willing to forgo short- term earnings and cash flow, and if the firm is willing and has the capacity to finance its growth. However, a firm that expects only a short-term increase in cash flow may adopt either a divest or a harvest strategy but not a build strategy. This type of SBU needs a lot of cash flow to finance its growth.

• Question 875:

  In the Boston Consulting Group (BCG) growth-share matrix, which strategic business units generate large amounts of cash, need heavy investment to grow and maintain competitive positioning, but usually have modest net cash flow?

  A. Cash cows.

  B. Question marks.

  C. Dogs.

  D. Stars.

  Correct Answer: D

  A star is a business with a strong competitive position in a growth industry. It has a high relative market share, and the market growth rate is high. Thus, the industry is robust, and the SBU is highly attractive. Net cash flow is modest because investment is heavy, although stars generate large amounts of cash.

• Question 876:

  A strategic business unit (SBU) has a relative market share (RMS) of 2.0 and a market growth rate (MGR) of 9.5%. According to the portfolio model for competitive analysis created by the Boston Consulting Group, such an SBU is considered a

  A. Star.

  B. Question mark.

  C. Cash cow.

  D. Dog.

  Correct Answer: C

  The annual MGR reflects the maturity and attractiveness of the market and the relative need for cash to finance expansion. An MGR of 10% or more is generally regarded as high. The RMS reflects an SBU's competitive position in the marketsegment. An RMS of 1.0 or moresignifies that the SBU has a strong competitive position. Cash cows have high RMS and low MGR. They are strong competitors and cash generators in low-growth markets.

• Question 877:

  A company sells a diverse line of cookies. Its acquisition of another company, a maker of cake mixes, is most likely an example of

  A. Vertical integration.

  B. Horizontal diversification.

  C. Concentric diversification.

  D. Conglomerate diversification.

  Correct Answer: B

  Horizontal diversification is the acquisition of businesses making products unrelated to current offerings but that might appeal to the firm's current customers. Cookies and cake mixes are based on different technologies but may be demanded by the same customers.

• Question 878:

  A starting point for developing competitive strategies is customer value analysis (CVA). According to theCVA approach.

  A. Customer value equals customer benefits.

  B. Bad competitors rather than good competitors should be targeted.

  C. Strong competitors should be avoided even when they have exploitable weaknesses.

  D. Distant competitors are the usual threats.

  Correct Answer: B

  Bad competitors should be targeted rather than good competitors. The former disturb the competitive equilibrium, e.g., by excessive expansion of capacity or overly risky behavior. The latter make sound business decisions that promote the long-term health of the industry, e.g., about prices, entry into newsegments, and pursuit of market share.

• Question 879:

  Usually, the cheapest way to gain market share is by targeting what class of competitors?

  A. Close competitors.

  B. Distant competitors.

  C. Weak competitors.

  D. Bad competitors.

  Correct Answer: C

  Using the results of a customer value analysis, a firm may target a given class of competitors in order to gain market share. Although there are various methods, targeting weak competitors is usually the cheapest way to gain market share because weak competitors generally do not offer much resistance.

• Question 880:

  Which of the following are steps in a customer value analysis (CVA)?

  I. Determining what customers value

  II.

  Having customers rank the relative significance of the elements of customer value III.Evaluating how well the firm and its competitors perform relative to the elements of customer value IV.Focusing on performance with respect to each element of customer value

  A.

  I, Ill, and IV only.

  B.

  I, II, and Ill only.

  C.

  I, II, and Ill only.

  D.

  I, II, Ill, and IV.

  Correct Answer: D

  The steps in a CVA are to:

  Determine what customers value.

  Assign quantitative amounts to the elements of customer value and have customers rank their relative significance.

  Evaluate how well the firm and its competitors perform relative to each element.

  Focus on performance with respect to each element, vis-a-vis an important competitor in a given

  market segment.

  Repeat the foregoing steps as circumstances change.