IIA IIA Certifications IIA-CIA-PART4 Questions & Answers

• Question 411:

  According to Michael E. Porter's analysis of the evolution of global industries, the factor that is always necessary for an industry to become global is:

  A. The existence of environmental triggers to begin globalization.

  B. A strategic innovation.

  C. Marketing economies of scale.

  D. Changes in the costs of the factors of production.

  Correct Answer: B

  The triggers of the evolution of global industries establish or exploit the sources of global competitive advantage. They also may negate the impediments to global competition. However, negating impediments will not result in globalization unless the firm has sufficient strategic advantages. Moreover, a strategic innovation is always necessary for an industry to become global. Environmental triggers include an increase in any of the types of economies of scale,lower transportation or storage costs, changes in distribution channels that facilitate access by foreign firms, changes in the costs of the factors of production, increased similarity of economic and social conditions in other nations, and reduction in governmental constraints. However, strategic innovations may begin globalization even if environmental triggers are not present. These innovations include, for example, product redefinition, reducing the costs of adapting a product for sale in different nations, design changes, and elimination of constraints.

• Question 412:

  Impediments to global competition may increase direct costs, make management more difficult, be imposed by governments or other institutions, or consist of resource limitations. Which of the following is most likely to be an impediment to global competition?

  A. A certain nation has a competitive advantage regarding the cost of producing a product.

  B. Proprietary technology provides a competitive advantage regarding the quality of a product.

  C. The product is highly differentiated.

  D. Product needs vary from country to country.

  Correct Answer: D

  Product needs may differ from country to country because of culture, climate, degree of economic development, income, legal requirements, technical standards, and other factors. This barrier inhibits global procurement and achievement of economies of scale and experience. The height of the barrier depends on the costs of product modifications. Complex segmentation within geographic markets has similar effects.

• Question 413:

  The reason(s) governments most likely restrict trade include

  I. To help foster new industries.

  II. To protect declining industries.

  III. To increase tax revenues.

  IV.

  To foster national security.

  A.

  I only.

  B.

  I and II only.

  C.

  II and Ill only.

  D.

  I, II, and IV only.

  Correct Answer: D

  Governmental impediments to global competition are generally imposed for the announced purpose of protecting local firms and jobs, developing new industries, and fostering national security. They also may have the effect of raising revenue in the short run. In the long run, tax and revenues will decline because of reduced trade. Examples of governmental impediments are tariffs; duties; quotas; domestic content rules; preferences for local firms regarding procurement,taxes, RandD, labor regulations, and other operating rules; and laws (e.g., antibribery or tax) enacted by a national government that impede national firms from competing globally. These impediments are most likely when industries are viewed as crucial.

• Question 414:

  Which of the following is a source of global competitive advantage?

  A. Low fixed costs.

  B. Production economies of scale.

  C. Weak copyright protection.

  D. Intensive local service requirements.

  Correct Answer: B

  Production economies of scale exist when a firm can produce and sell the output at which the average total cost of production is minimized. (The archetypal example is oil refining.) In other words, economies of scale in centralized production may yield a cost advantage achievable only when output exceeds the demand in one country, and exports are feasible.

• Question 415:

  A global industry is one that:

  A. Contains competitors that are multinationals.

  B. Has secured a competitive advantage based on economies of scale in centralized production.

  C. Has a strategic advantage by establishing coordinated competition in many national markets.

  D. Has made large direct investments abroad.

  Correct Answer: C

  The analysis of a competition in an industry requires consideration of the economics of the industry and the characteristics of competitors. However, in a global industry, the analysis is not limited to one market, but extends to all markets (geographic or national) taken together. Michael E. Porter defines a global industry as one in which the strategic positions of competitors in major geographic or national markets are fundamentally affected by their overall global positions."Thus, an industry becomes global because it perceives a net strategic advantage to competing, as Porter says, in a coordinated way in many national markets."

• Question 416:

  Which strategy in a global industry is most likely to be facilitated by a transnational coalition?

  A. A protected niche strategy.

  B. A national focus strategy.

  C. A national segment strategy.

  D. Broad line global competition.

  Correct Answer: D

  Broad line global competition is competition over the full product line of the firm based on differentiation or low cost. The firm needs large resources for this long-term strategy. Governmental relations should emphasize impediment reduction. Transnational coalitions may be created to help the firms overcome impediments to executing the broader strategies, for example, market access or technology barriers.

• Question 417:

  High exit barriers may restrain firms from leaving an industry even though returns are poor.

  Which of the following is not an exit barrier?

  A. Specialized assets.

  B. Avoidance of environmental safeguard requirements.

  C. Participation in a group executing an overall strategy.

  D. Cost of labor settlements.

  Correct Answer: B

  Net liquidation value is reduced when the fixed costs of exit are high, e.g., the cost of labor settlements, payments to professionals involved in the divestiture (CPAs, attorneys, etc.), cancellation of contracts (with distributors, suppliers, managers, etc.), and resettlement orretraining. Moreover, announcement of exit may have such effects as reduced employee productivity, loss of customers, and a decline in supplier reliability. However, some required investments, such as in environmental safeguards, may be avoided. Thus, avoiding the capital investment in environmental safeguards maybe a reason to exit an industry if the investment exceeds the expected profits. This is an example of a fixed cost that is not an exit barrier.

• Question 418:

  When uncertainty about an industry's future is greatest and other markets for the firm's assets are favorable, it should most likely follow a:

  A. Harvest strategy.

  B. Quick divestment strategy.

  C. Leadership strategy.

  D. Niche strategy.

  Correct Answer: B

  A quick divestment strategy assumes that the highest net recovery is obtained by sale early in the decline phase. It is then that uncertainty about the industry's future is greatest and other markets for the assets are most favorable. Indeed, divestiture may be indicated during the maturity phase prior to decline. But the firm risks being wrong about the onset of the decline phase. Quick divestment should be chosen when the industry structure is unfavorable, and the firm lacks strengths in the remaining pockets of demand.

• Question 419:

  Price wars are most likely in a(n):

  A. Emerging industry.

  B. Mature industry.

  C. Declining industry.

  D. Fragmented industry.

  Correct Answer: C

  Price wars are more likely in the decline phase. Rivalry is more intense when the product is viewed as a commodity, fixed costs and exit barriers are high, firms have strategic reasons for remaining and the resources to do so, and firms are relatively equally strong. In this environment, firms are tempted to take ill-advised competitive actions because of uncertainty about their positions.

• Question 420:

  A company experiences a decrease in unit sales over the long run. It is in a(n):

  A. Emerging industry.

  B. Global industry.

  C. Mature industry.

  D. Declining industry.

  Correct Answer: D

  A declining industry is not simply at a low point in the business cycle but has sustained a permanent decrease in unit sales over the long run. Michael E. Porter's view is that this phase of the industry life cycle does not correspond exactly to the decline stage in the product life cycle. Moreover, he argues that the nature of the competition and the range of strategic choices in the decline phase are diverse and vary widely from industry to industry. The result is that some industries may be able to negotiate decline without intense rivalry, long-term overcapacity, and ruinous losses.