IIA IIA Certifications IIA-CIA-PART4 Questions & Answers

• Question 421:

  Which factor signals a favorable structure in the remaining pockets of demand in a declining industry?

  A. Innovation.

  B. High switching costs.

  C. Changes in the needs or tastes of customers.

  D. Reduction in the size of a customer group.

  Correct Answer: B

  The structure of the remaining pockets of demand determines whether the surviving firms can be profitable. Prospects are favorable if the pockets include price-insensitive buyers of highly differentiated products. Prospects also are favorable if buyers have little bargaining power because of high switching costs or other factors, such as the need to replace the equipment of the suppliers that have withdrawn from the industry. Furthermore, firms operating in remaining pockets may thrive if mobility barriers are high (preventing firms in other segments from competing) and if substitute products or strong suppliers are not threats. High switching costs mean that buyers are less likely to purchase substitutes. Thus, future demand is more certain, and the structure is more favorable.

• Question 422:

  In a declining industry with a favorable structure, a firm may have the ability to recover additional investment or to earn above-average returns in the remaining pockets of demand. Such a firm is most likely to follow a:

  A. Quick divestment strategy.

  B. Harvest strategy or quick divestment strategy.

  C. Leadership strategy or harvest strategy.

  D. Leadership strategy or niche strategy.

  Correct Answer: D

  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. A niche strategy seeks a market segment (pocket of demand) with stable or slowly decreasing demand with the potential for above-average returns. Some of the moves undertaken when following a leadership strategy may be appropriate. The firm may eventually change to a harvest or divest strategy.

• Question 423:

  A firm in a declining industry that adopts a harvest strategy assumes that:

  A. Intense competition is absent.

  B. Pockets of stable demand still exist.

  C. The highest recovery is obtainable by early sale.

  D. Aggressive marketing will drive out competition.

  Correct Answer: A

  A harvest strategy is in effect a controlled, gradual liquidation. It maximizes cash flow by minimizing new investment, RandD, advertising service, maintenance, etc., and by exploiting the firm's remaining strengths (e.g., goodwill) to increase prices or maintain sales volume. To besuccessful, the strategy assumes that the firm has certain strengths and intense competition is absent. The strengths permit the firm to maintain sales for a time in the face of price increases, reduced advertising, etc. Absence of intense competition means that other firms will be less likely to seize market share or lower prices. Moreover, a firm must be capable of cost reductions that do not cause immediate failure.

• Question 424:

  Which of the following is a reason for a firm to remain in an industry despite poor profits?

  A. Lack of vertical integration.

  B. Economies of scale are not significant.

  C. The firm's assets have a low liquidation value.

  D. Distribution channels are willing to accept new products.

  Correct Answer: C

  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 425:

  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 426:

  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 427:

  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 428:

  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 429:

  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 430:

  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.