Certified Management Accountant Strategic Management 4 — Questions and Answers
Question 1: In the context of the CMA exam, 'enterprise risk management' (ERM) is best described as:
- A process limited to financial risk identification and hedging
- A company-wide framework for identifying, assessing, and managing risks across all business activities (Correct answer)
- The role of the internal audit function in detecting fraud
- An insurance strategy for protecting physical assets
Correct answer: A company-wide framework for identifying, assessing, and managing risks across all business activities
ERM is a holistic, integrated approach endorsed by COSO that addresses all categories of risk — strategic, operational, financial, and compliance — across the entire organization.
Question 2: Which of the following is an example of a 'lagging indicator' in performance measurement?
- Employee training hours completed
- Number of new product patents filed
- Annual return on equity (Correct answer)
- Customer satisfaction survey scores
Correct answer: Annual return on equity
Lagging indicators like ROE measure outcomes after they have occurred, reflecting past performance rather than predicting future results.
Question 3: A company decides to outsource its IT infrastructure to focus on its core competencies. This decision is primarily guided by:
- Transaction cost theory — reducing internal governance costs
- Resource-based view — concentrating on activities where the firm has distinctive strengths (Correct answer)
- Porter's Five Forces — reducing supplier bargaining power
- Agency theory — aligning manager and shareholder interests
Correct answer: Resource-based view — concentrating on activities where the firm has distinctive strengths
The resource-based view suggests firms should focus internal resources on core competencies where they have sustainable advantages, outsourcing non-core activities to specialists.
Question 4: Which concept describes the risk that a firm's strategy becomes obsolete due to rapid technological or market changes?
- Operational risk
- Strategic obsolescence risk (Correct answer)
- Compliance risk
- Liquidity risk
Correct answer: Strategic obsolescence risk
Strategic obsolescence risk arises when environmental changes — technological disruption, shifting customer preferences — erode the relevance of a firm's current strategy.
Question 5: The 'GE-McKinsey Nine-Box Matrix' evaluates business units based on:
- Market share and revenue growth
- Industry attractiveness and business unit competitive strength (Correct answer)
- Return on investment and risk level
- Cash flow potential and market size
Correct answer: Industry attractiveness and business unit competitive strength
The GE-McKinsey matrix plots business units on two dimensions — industry attractiveness and business unit strength — to guide investment and divestiture decisions.
Question 6: In strategic management, 'core rigidities' refer to:
- Inflexible accounting standards that limit financial reporting
- Formerly successful core competencies that become barriers to innovation and adaptation (Correct answer)
- Government regulations that restrict competitive behavior
- Fixed assets that cannot be easily converted to other uses
Correct answer: Formerly successful core competencies that become barriers to innovation and adaptation
Core rigidities, identified by Leonard-Barton, occur when deeply embedded competencies that once drove success prevent a firm from recognizing and responding to new opportunities.
Question 7: A company that implements a 'transnational strategy' is attempting to simultaneously achieve:
- Global efficiency and local responsiveness (Correct answer)
- Maximum standardization and centralized decision-making
- Full decentralization with no shared global standards
- Cost leadership in domestic markets only
Correct answer: Global efficiency and local responsiveness
The transnational strategy seeks to balance global efficiency through integration with local responsiveness through adaptation, capturing benefits of both approaches.
Certified Management Accountant Strategic Management 4
In the context of the CMA exam, 'enterprise risk management' (ERM) is best described as: