IIA Certified Internal IIA-CIA-PART4 Questions & Answers

• Question 31:

  A firm that wishes to obtain the benefits of vertical integration may acquire a minority common stock interest in a supplier or customer firm. This arrangement is most appropriately described as:

  A. Partial integration.

  B. Tapered integration

  C. Quasi-integration.

  D. Contract integration

  Correct Answer: C

  Quasi-integration is something more than a long-term contract and less than full ownership. It may be achieved by a minority common stock interest, debt guarantees, cooperation in RandD, an exclusive dealing arrangement, etc. Buyer and seller may, as a result, have aspecial community of interest leading to lower costs, smoothing of supply/demand fluctuations, or mitigating against bargaining power. Quasi-integration may avoid commitment to an adjacent business, with its investment and management requirements. But many benefits of full integration may not be achievable in this wav.

• Question 32:

  A vertically integrated organization is best described as one that:

  A. Owns all of its production facilities.

  B. Manufactures the component parts used in its product.

  C. Is departmentalized by product or service.

  D. Fosters very narrow span of control.

  Correct Answer: B

  An organization is vertically integrated if it unites sources of supply, the production of finished goods, and the marketing of the product. In other words, complete vertical integration combines all phases of the production and delivery of products or services.

• Question 33:

  The decision to integrate a firm vertically most likely should be based on:

  A. A balance of economic and administrative factors.

  B. Strategic economic issues.

  C. Investment required.

  D. The effect of the acquisition on costs.

  Correct Answer: A

  The decision to integrate should consider not only direct economic issues (needed investment and effects on costs), but also broader strategic issues and the potential difficulties of administering a vertically integrated firm. Thus, the extent of integration depends on the balance of economic and administrative benefits and costs. This balance varies with the industry, the firm's position, and whether the firm engages in full integration, tapered (partial) integration, or quasi- integration (use of alliances, not ownership, to achieve the effects of integration).

• Question 34:

  A milk producer company acquires its own dairy farms to supply milk. The growth strategy adopted by the company is:

  A. Horizontal integration.

  B. Vertical integration.

  C. Concentric diversification.

  D. Conglomerate diversification.

  Correct Answer: B

  Vertical integration occurs when a company becomes its own supplier or distributor. It combines within a firm production, distribution, selling, or other separate economic processes needed to deliver a product or service to a customer.

• Question 35:

  Which of the following is an arrangement that involves partial integration and implies the ability to fully support an efficient subunit?

  A. Quasi-integration.

  B. Tapered integration.

  C. Upstream integration.

  D. Contract integration.

  Correct Answer: B

  Tapered (partial) integration implies that the firm can fully support an efficient subunit but has additional needs to be met in the market. If the in-house subunit will not be efficient, that inefficiency must be weighed against the benefits of tapering. Tapering resultsin lower fixed costs than full integration. Furthermore, the strategy may allow the firm's subunit(s) to maintain constant production rates while external parties bear the risk of fluctuations. Another use of tapering is to protect against operational imbalances among the subunits. A risk of tapering is selling to, or buying from, competitors. Another is greater coordination cost. Advantages of tapering are avoidance of locked-in relationships, some access to external expertise, increased managerial incentives, offering a credible threat of full integration to suppliers or customers, and obtaining knowledge of the adjacent business and an emergency supply source.

• Question 36:

  The decision to engage in the vertical integration of a firm is in large part a function of an analysis of throughput and economies of scale. If throughput is less than the efficient scale, the firm:

  A. Should acquire a capability equal to the firm's throughput.

  B. Must sell or buy in the open market if the firm vertically integrates at the efficient scale.

  C. Should engage in quasi-integration.

  D. Should not vertically integrate.

  Correct Answer: B

  Upstream (backward) or downstream (forward) integration is the acquisition of a capability that otherwise would be performed by external parties that are suppliers or customers, respectively, of the firm. Whether integration should occur depends on the firm's volume of transactions with the external parties (throughput) and the magnitude of the capability required to achieve necessary economies of scale. If the integrating firm's need is for a capability less than the efficient scale, one of its options is to acquire a capability with a cost inefficient scale. The other option is to acquire an efficient capability that provides excess output (in the upstream case) orcreates excess demand (from, for example, a distribution capability in the downstream case). This option will require the integrated firm to sell or buy in the open market. Thus, the second option carries the risk of having to deal with competitors.

• Question 37:

  Backward integration strategy is most appropriate when the firm's current suppliers are:

  A. Highly reliable.

  B. Not reliable.

  C. Geographically dispersed.

  D. Geographically concentrated.

  Correct Answer: B

  Backward integration is appropriate when the firm's current suppliers are unreliable. Stable relationships between internal sellers and buyers create economies because they need not fear loss of the related buyers and sellers. They also need not fear undue economicpressure from each other. Furthermore, because the relationship is locked in, more efficient procedures for their relationship (e.g., dedicated controls and records) may be implemented. Another advantage is that internal sellers and buyers may more fully adapt to each other's needs than they would or could in dealings with outsiders.

• Question 38:

  Entry into a new business may be by acquisition. An acquisition is most likely to earn aboveaverage profits when:

  A. The firm has competition from an irrational bidder.

  B. The economy is strong.

  C. The firm pays the seller a premium over the expected present value to the seller.

  D. The firm has a unique ability to operate the seller.

  Correct Answer: D

  The buyer may have a unique ability to operate the seller. Thus, the buyer may (1) be uniquely able to improve operations or

  (2) purchase a firm in an industry that meets one of the conditions for an internal entrant to earn above- average profits (e.g., low entry costs or disequilibrium).

• Question 39:

  A long-term supplier has asked your company to negotiate some increased purchases and faster payment. The supplier is having some financial difficulty, but your firm has been quite profitable lately, having experienced growing sales. Your firm's best negotiation strategy is:

  A. Collaboration.

  B. Competition.

  C. Subordination

  D. Avoidance.

  Correct Answer: C

  The supplier should be allowed to take the lead in making proposals. The firm should go along with anything reasonable.

• Question 40:

  Which of the following would be the best approach for negotiating the purchase of a large number of microcomputers, assuming that both parties follow the same approach?

  A. Review previous demands, concessions, and settlements (precedents).

  B. Attempt to get personal information about the opposing negotiators.

  C. Enter without preconceived ideas about what should be accomplished.

  D. Ask as few questions as possible during negotiations.

  Correct Answer: A

  The best approach to negotiating a large purchase, assuming that both parties follow the same approach, is to review previous settlements, demands, and concessions to determine what can be achieved. The history of past practices and interactions tends to define current standards of fairness in negotiations.