Free IIA-CIA-PART4 Exam Braindumps (page: 29)

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A firm in a declining industry ordinarily adopts one of four strategies. A firm that follows a:

  1. Quick divestment strategy should have divested during the maturity phase.
  2. Leadership strategy may assume that success will enable the firm to subsequently pursue a harvest strategy.
  3. Harvest strategy seeks a pocket of stable demand.
  4. Niche strategy is engaged in a gradual liquidation.

Answer(s): B

Explanation:

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. This strategy may entail aggressive pricing, marketing, or other investments that raise the stakes for competitors; reducing competitors' exit barriers by acquisitions of their capacity or products, assuming their contracts, and producing spare parts and generic versions of goods for them; demonstrations of strength and resolve to remain in the industry; and publicizing accurate data about the reality of future decline so as to dispel competitors' uncertainty.



Which of the following is not characteristic of a mature industry environment?

  1. Consolidation.
  2. Competitive interdependence.
  3. Falling demand.
  4. Strategic focus on deterring entry of new competitors into the marketplace.

Answer(s): C

Explanation:

Falling demand is characteristic of declining industries. These industries have sustained a permanent decrease in unit sales over the long run.



A firm is most likely to leave a declining industry because

  1. The remaining pockets of demand include price-insensitive buyers.
  2. It is the only part of a vertically integrated business that is affected.
  3. Buyers have high switching costs.
  4. Mobility barriers are high.

Answer(s): B

Explanation:

Vertical integration of a business may require exit of the entire chain when the reasons for decline affect all its parts. However, when only one part of the vertically integrated business is in a declining industry, integration is an argument for exit of the affected part. Divestiture prevents the weak link from harming the entire chain.



Which of the following is a reason for a firm to remain in an industry despite poor profits?

  1. Lack of vertical integration.
  2. Economies of scale are not significant.
  3. The firm's assets have a low liquidation value.
  4. Distribution channels are willing to accept new products.

Answer(s): C

Explanation:

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.






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