IIA IIA Certifications IIA-CIA-PART4 Questions & Answers

• Question 431:

  Which of the following is not a limit on emerging industry development?

  A. Raw materials and components.

  B. Subsidies.

  C. Product quality.

  D. Regulatory approval.

  Correct Answer: B

  Subsidies are a structural characteristic of an emerging market. If a subsidy is given by the government or other party, it usually assists the growth of the new industry instead of hindering it. Subsidies tend to focus on radically new technology or technology in which societal concern is strong.

• Question 432:

  Regulatory approval is most likely to be hardest to obtain in:

  A. Mature industries.

  B. Fragmented industries.

  C. Emerging industries.

  D. Declining industries.

  Correct Answer: C

  Regulatory approval for an emerging industry may be hard to obtain, especially if customer needs are already served by an established regulated industry. However, favorable government policy may jump-start an industry, for example, when use of a safety productbecomes mandatory. Moreover, further growth of an industry may be stunted when it attracts first-time regulation.

• Question 433:

  A firm considering entry into an emerging industry must be aware of many strategic factors. Thus, the firm must anticipate that:

  A. Early mobility barriers are likely to persist.

  B. Early commitment to suppliers is a strategic trap.

  C. The high cost of opening the market favor early entry.

  D. The nature of entrants may change.

  Correct Answer: D

  The nature of entrants may change to include larger firms attracted by the proven and less risky industry. Firms must predict when such entry is likely given existing and probable future barriers and the costs of surmounting them. Firms also need to predict how new entrants will compete, e.g., on the basis of marketing power or economies of scale. Furthermore, new entrants may emerge through vertical integration.

• Question 434:

  A structural characteristic of an emerging industry is:

  A. Strategic uncertainty.

  B. Customers are sophisticated.

  C. Technological uncertainty has been overcome.

  D. Industry development is unlimited.

  Correct Answer: A

  Strategic uncertainty arises because effective strategies have not yet been identified. Hence, firms are experimenting with product features, production methods, marketing approaches, etc. Moreover, competitive intelligence is necessarily poor because competitors have not been identified and industry sales and other data are not available.

• Question 435:

  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 436:

  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 437:

  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 438:

  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 439:

  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 440:

  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.