CIPS L4M2 Practice Exams
Last updated on Oct 22,2026- Exam Code: L4M2
- Exam Name: Defining Business Needs
- Certification Provider: CIPS
- Latest update: Oct 22,2026
Question #41
When a procurement manager considers a substitution, the number and nature of additional functions that substitute provides should be taken into account carefully.
Which of the following ratio could help the procurement manager to make the right decision?
- A . Value to price ratio
- B . Price to Earnings ratio
- C . Reserve requirement ratio
- D . Price to book value ratio
Correct Answer: A
A
Explanation:
One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs.
In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer’s propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently.
The threat of substitution, then, is a function of three factors:
• The relative value/ price of a substitute compared to an industry’s product
• The cost of switching to the substitute
• The buyer’s propensity to switch
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278).
Free Press. Kindle Edition.
The price-to-book ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country’s central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio. LO 2, AC 2.2
A
Explanation:
One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs.
In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer’s propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently.
The threat of substitution, then, is a function of three factors:
• The relative value/ price of a substitute compared to an industry’s product
• The cost of switching to the substitute
• The buyer’s propensity to switch
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278).
Free Press. Kindle Edition.
The price-to-book ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country’s central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio. LO 2, AC 2.2
Question #42
Which of the following provides in-depth detail for both functional and non-functional require-ments and covers assumptions, constraints, performance, dimensions, weights and reliability of a product?
- A . Performance specification
- B . Tolerance
- C . Statement of work
- D . Design specification
Correct Answer: D
D
Explanation:
Design specification is a detailed document providing a list of points regarding a product or pro-cess. For example, the design specification could include required dimensions, environmental fac-tors, ergonomic factors, aesthetic factors, maintenance that will be needed, etc. It may also give specific examples of how the design should be executed, helping others work properly (a guideline for what the person should do).
Performance specification is written requirement that describes the functional performance criteria required for a particular equipment, material, or product.
Tolerance is the permissable limit of a variable used to define a product
Statement of work is the document that captures and defines all aspects of a project, including the activities, deliverables and the timetable for the project.
Reference: CIPS study guide page 118
LO 3, AC 3.1
D
Explanation:
Design specification is a detailed document providing a list of points regarding a product or pro-cess. For example, the design specification could include required dimensions, environmental fac-tors, ergonomic factors, aesthetic factors, maintenance that will be needed, etc. It may also give specific examples of how the design should be executed, helping others work properly (a guideline for what the person should do).
Performance specification is written requirement that describes the functional performance criteria required for a particular equipment, material, or product.
Tolerance is the permissable limit of a variable used to define a product
Statement of work is the document that captures and defines all aspects of a project, including the activities, deliverables and the timetable for the project.
Reference: CIPS study guide page 118
LO 3, AC 3.1
Question #43
The level of regulation is reduced
- A . 3 and 4 only
- B . 1 and 3 only
- C . 2 and 4 only
- D . 1 and 2 only
Correct Answer: B
Question #43
The level of regulation is reduced
- A . 3 and 4 only
- B . 1 and 3 only
- C . 2 and 4 only
- D . 1 and 2 only
Correct Answer: B
Question #43
The level of regulation is reduced
- A . 3 and 4 only
- B . 1 and 3 only
- C . 2 and 4 only
- D . 1 and 2 only
Correct Answer: B
Question #46
Despite of better improvement rates than other types of benchmarking, functional benchmarking still has downsides.
Which of the following is most likely to be a disadvantage of functional benchmarking?
- A . Legal issues regarding intellectual property
- B . Unfair competition
- C . Difference of corporate cultures across companies
- D . Benchmarking can only be undertaken within an industry
Correct Answer: C
C
Explanation:
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.
Benefits
– Provides industry trend information
– Quantitative comparisons
– Better improvement rate Challenges
– Diverse corporate cultures
– Great need for specificity
– Not invented here. syndrome
– Common functions can be difficult to find
– Takes more time than internal or percent
– Must be able to visualize how to adapt the best practices Source: USN Benchmarking Handbook
LO 1, AC 1.3
C
Explanation:
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.
Benefits
– Provides industry trend information
– Quantitative comparisons
– Better improvement rate Challenges
– Diverse corporate cultures
– Great need for specificity
– Not invented here. syndrome
– Common functions can be difficult to find
– Takes more time than internal or percent
– Must be able to visualize how to adapt the best practices Source: USN Benchmarking Handbook
LO 1, AC 1.3
Question #46
Despite of better improvement rates than other types of benchmarking, functional benchmarking still has downsides.
Which of the following is most likely to be a disadvantage of functional benchmarking?
- A . Legal issues regarding intellectual property
- B . Unfair competition
- C . Difference of corporate cultures across companies
- D . Benchmarking can only be undertaken within an industry
Correct Answer: C
C
Explanation:
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.
Benefits
– Provides industry trend information
– Quantitative comparisons
– Better improvement rate Challenges
– Diverse corporate cultures
– Great need for specificity
– Not invented here. syndrome
– Common functions can be difficult to find
– Takes more time than internal or percent
– Must be able to visualize how to adapt the best practices Source: USN Benchmarking Handbook
LO 1, AC 1.3
C
Explanation:
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.
Benefits
– Provides industry trend information
– Quantitative comparisons
– Better improvement rate Challenges
– Diverse corporate cultures
– Great need for specificity
– Not invented here. syndrome
– Common functions can be difficult to find
– Takes more time than internal or percent
– Must be able to visualize how to adapt the best practices Source: USN Benchmarking Handbook
LO 1, AC 1.3
Question #46
Despite of better improvement rates than other types of benchmarking, functional benchmarking still has downsides.
Which of the following is most likely to be a disadvantage of functional benchmarking?
- A . Legal issues regarding intellectual property
- B . Unfair competition
- C . Difference of corporate cultures across companies
- D . Benchmarking can only be undertaken within an industry
Correct Answer: C
C
Explanation:
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.
Benefits
– Provides industry trend information
– Quantitative comparisons
– Better improvement rate Challenges
– Diverse corporate cultures
– Great need for specificity
– Not invented here. syndrome
– Common functions can be difficult to find
– Takes more time than internal or percent
– Must be able to visualize how to adapt the best practices Source: USN Benchmarking Handbook
LO 1, AC 1.3
C
Explanation:
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to move operational forces, etc.) within the same or similar functions outside the immediate industry. Functional benchmarking might identify practices that are superior in your functional areas in whatever industry they may exist. Functional benchmarking would be accomplished at the federal level by comparing the IRS collections process against those of American Express. Comparing copper mining techniques to coal mining techniques is an example in the private sector.
Benefits
– Provides industry trend information
– Quantitative comparisons
– Better improvement rate Challenges
– Diverse corporate cultures
– Great need for specificity
– Not invented here. syndrome
– Common functions can be difficult to find
– Takes more time than internal or percent
– Must be able to visualize how to adapt the best practices Source: USN Benchmarking Handbook
LO 1, AC 1.3
Question #49
Which of the following are most likely to negatively affect the suppliers’ bargaining power in a specific market? Select TWO that apply:
- A . Many suppliers are intent on integrating buyers into their business
- B . Substitute products are readily available in the market
- C . There are no differences among suppliers’ products
- D . Buyers incur high cost when they change their suppliers
- E . There are almost no threats of backward integration
Correct Answer: B, C
B, C
Explanation:
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry.
Supplier is weak if:
– Substitutes are available and easy to access
– Suppliers are small and fragmented
– The industry is important to the seller
– The sellers’ product or service is not an important of the industry’s value chain
– The sellers’ product or service is undifferentiated
– There are no significant switching costs
– There is no threat of forward integration.
Suppliers may have more power:
– If they are in concentrated numbers compared to buyers.
– If there are high switching costs associated with a move to another supplier.
– If they are able to integrate forward or begin producing the product themselves.
– If they have specific expertise or technology needed to manufacture goods.
– If their product is highly differentiated.
– If there are many buyers and none make up significant portions of sales.
– If there are no substitutes available.
– If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.
LO 2, AC 2.2
B, C
Explanation:
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry.
Supplier is weak if:
– Substitutes are available and easy to access
– Suppliers are small and fragmented
– The industry is important to the seller
– The sellers’ product or service is not an important of the industry’s value chain
– The sellers’ product or service is undifferentiated
– There are no significant switching costs
– There is no threat of forward integration.
Suppliers may have more power:
– If they are in concentrated numbers compared to buyers.
– If there are high switching costs associated with a move to another supplier.
– If they are able to integrate forward or begin producing the product themselves.
– If they have specific expertise or technology needed to manufacture goods.
– If their product is highly differentiated.
– If there are many buyers and none make up significant portions of sales.
– If there are no substitutes available.
– If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.
LO 2, AC 2.2
Question #49
Which of the following are most likely to negatively affect the suppliers’ bargaining power in a specific market? Select TWO that apply:
- A . Many suppliers are intent on integrating buyers into their business
- B . Substitute products are readily available in the market
- C . There are no differences among suppliers’ products
- D . Buyers incur high cost when they change their suppliers
- E . There are almost no threats of backward integration
Correct Answer: B, C
B, C
Explanation:
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry.
Supplier is weak if:
– Substitutes are available and easy to access
– Suppliers are small and fragmented
– The industry is important to the seller
– The sellers’ product or service is not an important of the industry’s value chain
– The sellers’ product or service is undifferentiated
– There are no significant switching costs
– There is no threat of forward integration.
Suppliers may have more power:
– If they are in concentrated numbers compared to buyers.
– If there are high switching costs associated with a move to another supplier.
– If they are able to integrate forward or begin producing the product themselves.
– If they have specific expertise or technology needed to manufacture goods.
– If their product is highly differentiated.
– If there are many buyers and none make up significant portions of sales.
– If there are no substitutes available.
– If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.
LO 2, AC 2.2
B, C
Explanation:
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry.
Supplier is weak if:
– Substitutes are available and easy to access
– Suppliers are small and fragmented
– The industry is important to the seller
– The sellers’ product or service is not an important of the industry’s value chain
– The sellers’ product or service is undifferentiated
– There are no significant switching costs
– There is no threat of forward integration.
Suppliers may have more power:
– If they are in concentrated numbers compared to buyers.
– If there are high switching costs associated with a move to another supplier.
– If they are able to integrate forward or begin producing the product themselves.
– If they have specific expertise or technology needed to manufacture goods.
– If their product is highly differentiated.
– If there are many buyers and none make up significant portions of sales.
– If there are no substitutes available.
– If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.
LO 2, AC 2.2