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IIA IIA-CIA-PART4 Exam
Certified Internal Auditor - Part 4, Business Management Skills (Page 28 )

Updated On: 18-Jan-2026
Page 21 of 108
PDF with 535 Questions

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.

  1. I and II only.
  2. I and IV only.
  3. II, III, and IV only.
  4. I, II, Ill, and IV).

Answer(s): B

Explanation:

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 °stuck" 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.



A fragmented industry is most likely to:

  1. Have substantial economies of scale.
  2. Have low transportation costs.
  3. Be characterized by suppliers with little bargaining power.
  4. Approximate pure competition.

Answer(s): D

Explanation:

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.



Coping with fragmentation requires strategic positioning. Which strategic position is a focus strategy that enhances bargaining power with suppliers and increases differentiation?

  1. Backward integration.
  2. Tightly managed decentralization.
  3. Specialization by product type or segment.
  4. Developing formula facilities.

Answer(s): C

Explanation:

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.



What is the last step in Porter's framework for developing a competitive strategy in a fragmented industry?

  1. Create a full list of reasons for fragmentation.
  2. Select the best strategy for operating in a fragmented environment.
  3. Evaluate whether a new structure will yield acceptable returns and what position the firm should occupy.
  4. Determine the industry's structure.

Answer(s): B

Explanation:

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.



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?

  1. A long time horizon for product development.
  2. Low initial costs and a shallow learning curve.
  3. Mobility barriers include economies of scale and brand identification.
  4. The presence of embryonic companies and spinoffs.

Answer(s): D

Explanation:

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.



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