Exam 8: Organizing to Implement Corporate Diversification

Corporate spin-offs are different from asset divestitures.

To the extent that a firm exploits real economies of scope in implementing a diversification strategy, it will be able to unambiguously evaluate the performance of individual divisions in that firm.

The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation.

In principle, only the CEO and the president report to the board of directors while other senior managers report only to the CEO.

Divisions in an M-form organization should be large enough to represent identifiable business entities but small enough so that a division general manager can manage each one effectively.

Discuss the role of accounting measures of divisional performance, identify three different standards of comparison that can be used when evaluating the accounting performance of a division along with the strengths and weaknesses of each standard, and describe the potential weaknesses of accounting measures of divisional performance.

Discuss the importance of compensation policies in diversified firms and identify the CEO compensation package that most closely aligns the interests of the CEO with those of stockholders.

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a True profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. -Kelly Rae's position is SpandoCorp is best described as a(n)

It is unusual for a diversified firm to change its transfer-pricing mechanisms every few years in an attempt to find the "right" transfer-pricing mechanism.

The most common organization structure for implementing a corporate diversification strategy is the U-form.

Describe the multidivisional, or M-form structure, and how it is used to implement a corporate diversification strategy.

A board of directors typically consists of 15 to 30 individuals drawn from a firm's top management group and from individuals outside the firm.

If institutional investors are biopic, they should influence firms to invest in relatively less R&D.

Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.

In an agency relationship the party delegating the decision-making authority is called the agent.

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a True profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. -If SpandoCorp decides to use the method of allocating capital where each project receives funding on its merit and not because it received funding the previous year, it is using

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a True profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. -Grace McKenna is best described as a(n) ________ in SpandoCorp.

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a True profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders. -If SpandoCorp used a ________ budgeting process, it would assume that no project would receive funding for the future simply because it was funded in the past and would require each project to stand on its own merits each year to be included in a list of important projects that the firm can afford to fund.

Describe the nature and role of the board of directors in an M-form organization and discuss who generally serves on the board, the role of outside members on a board of directors and when the roles of CEO and chairman of the board should be combined or separated.

Transfer prices should equal opportunity cost.