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IIA IIA-CIA-PART4 Exam
Certified Internal Auditor - Part 4, Business Management Skills (Page 20 )

Updated On: 12-Jan-2026
Page 20 of 108
PDF with 535 Questions

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:

  1. A learning curve effect.
  2. Diseconomies of scale.
  3. High entry barriers.
  4. Low exit barriers.

Answer(s): B

Explanation:

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.



The opportunity for franchising comes from the ability to:

  1. Develop products.
  2. Differentiate products.
  3. Standardize products.
  4. Diversify products.

Answer(s): C

Explanation:

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.



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

  1. Emerging industries.
  2. Declining industries.
  3. Fragmented industries.
  4. Mature industries.

Answer(s): C

Explanation:

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.



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?

  1. Specialization by product type.
  2. Backward integration.
  3. An emphasis on low overhead and low payroll.
  4. Development of formula facilities.

Answer(s): A

Explanation:

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.



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

  1. Seek dominance to overcome fragmentation.
  2. Assume that competitors have similar costs.
  3. Avoid centralization of the organizational structure.
  4. Invest heavily to respond quickly to new product demand.

Answer(s): C

Explanation:

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.



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