IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 811:

  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 812:

  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 813:

  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 814:

  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 815:

  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 816:

  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.

• Question 817:

  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 818:

  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 819:

  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 820:

  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.