CPA CFE Strategy and Governance 3 — Questions and Answers
Question 1: What is a key characteristic of a blue ocean strategy?
- Competing aggressively in existing markets for market share
- Creating uncontested market space by offering innovative value that makes competition irrelevant (Correct answer)
- Following the market leader's strategy closely
- Reducing prices below all competitors
Correct answer: Creating uncontested market space by offering innovative value that makes competition irrelevant
Blue ocean strategy involves creating new market space where competition is irrelevant, rather than competing in crowded existing markets (red oceans). It focuses on value innovation — simultaneously pursuing differentiation and low cost to open up new demand.
Question 2: Under Canadian securities regulation, what is the role of National Instrument 52-109?
- It governs insider trading rules
- It requires CEO and CFO certification of annual and interim filings, including internal controls over financial reporting (Correct answer)
- It establishes rules for proxy solicitation
- It defines the requirements for initial public offerings
Correct answer: It requires CEO and CFO certification of annual and interim filings, including internal controls over financial reporting
NI 52-109 requires the CEO and CFO of reporting issuers to personally certify the accuracy of financial statements and the effectiveness of internal controls over financial reporting and disclosure controls and procedures, similar to US SOX requirements.
Question 3: In strategic management, what does the value chain analysis identify?
- The market price of a company's shares
- The primary and support activities that create value and can provide competitive advantage (Correct answer)
- The total number of employees in each department
- The company's credit rating
Correct answer: The primary and support activities that create value and can provide competitive advantage
Value chain analysis, developed by Michael Porter, breaks down a firm's activities into primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (firm infrastructure, HRM, technology, procurement) to identify sources of competitive advantage.
Question 4: What is the primary objective of a PESTEL analysis?
- To evaluate the company's internal competencies
- To scan the macro-environment for Political, Economic, Social, Technological, Environmental, and Legal factors affecting the organization (Correct answer)
- To assess the performance of individual employees
- To determine the optimal capital structure
Correct answer: To scan the macro-environment for Political, Economic, Social, Technological, Environmental, and Legal factors affecting the organization
PESTEL analysis systematically examines the macro-environmental factors that influence an organization: Political (government policy), Economic (growth, inflation), Social (demographics, culture), Technological (innovation), Environmental (sustainability), and Legal (regulations).
Question 5: What is the fiduciary duty of a director under Canadian corporate law?
- To maximize short-term share price at all costs
- To act honestly and in good faith with a view to the best interests of the corporation (Correct answer)
- To follow the CEO's instructions without question
- To ensure the company pays maximum dividends each year
Correct answer: To act honestly and in good faith with a view to the best interests of the corporation
Under the Canada Business Corporations Act (CBCA), directors owe a fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation. This includes exercising the care, diligence, and skill of a reasonably prudent person.
Question 6: A company decides to pursue a differentiation strategy. What is the main risk of this approach?
- The company will always have the lowest costs
- Customers may not value the differentiation enough to pay the premium price, or competitors may imitate the differentiating features (Correct answer)
- The company will be unable to serve any market segment
- Differentiation strategies never generate above-average returns
Correct answer: Customers may not value the differentiation enough to pay the premium price, or competitors may imitate the differentiating features
The main risks of differentiation include: customers may not be willing to pay the premium, the cost of differentiating may be too high, competitors may successfully imitate the differentiating features, and customer preferences may shift, reducing the perceived value of the differentiation.
CPA CFE Strategy and Governance 3
What is a key characteristic of a blue ocean strategy?