IIA IIA Certifications IIA-CIA-PART4 Questions & Answers

• Question 441:

  A firm in a fragmented industry should most likely take what action to avoid a strategic trap?

  A. Seek dominance to overcome fragmentation.

  B. Assume that competitors have similar costs.

  C. Avoid centralization of the organizational structure.

  D. Invest heavily to respond quickly to new product demand.

  Correct Answer: C

  Over centralization of the organizational structure is often a mistake. In the intense competition of a fragmented industry, quick response times, local contacts, personal service, and tight operating control are essential.

• Question 442:

  A firm in a fragmented industry must position itself by adopting a competitive strategy appropriate to the industry. 1hich of the following is most clearly a focus strategy?

  A. Specialization by product type.

  B. Backward integration.

  C. An emphasis on low overhead and low payroll.

  D. Development of formula facilities.

  Correct Answer: A

  A focus strategy is directed at a buyer group, segment of the product line, or geographic area. Thus, the strategic target is narrow compared with an industry wide strategy designed to achieve cost leadership or product differentiation. Specialization by product type or segment is a focus strategy. This focus may enhance bargaining power with suppliers. It may also increase differentiation because of the perceived expertise and image. The downside is reduced growth opportunities.

• Question 443:

  In which of the following industry environments would an internal auditor be most likely to recommend strategies such as franchising and horizontal mergers?

  A. Emerging industries.

  B. Declining industries.

  C. Fragmented industries.

  D. Mature industries.

  Correct Answer: C

  Strategies such as chaining, franchising, and horizontal mergers are commonly used in fragmented industries. 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. Isolating factors responsible for fragmentation has been achieved in, for example, the fast food industry. The need to have numerous local operations under tight control and near customers has been isolated or neutralized by franchising to local owners. The franchisor provides national advertising, centralized purchasing, and other services, which result in economies of scale and industry consolidation. In effect, the service or production function is separated from the rest of the business. Also, acquisitions (horizontal mergers) that enable a firm to expand when competing with local firms might be difficult because of their contacts and image.

• Question 444:

  The opportunity for franchising comes from the ability to:

  A. Develop products.

  B. Differentiate products.

  C. Standardize products.

  D. Diversify products.

  Correct Answer: C

  Standardizing products means to maintain the same product or to standardize the production, operations, and facilities in different locations or markets. Franchises all use standardized products to reduce costs.

• Question 445:

  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 446:

  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 447:

  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 448:

  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 449:

  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 450:

  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.