Deck 10: Organizing to Implement Corporate Diversification

Question 1

In 1970,institutions owned ________ percent of the equity traded in the United States and by 2005 they owned ________ percent of the equity traded in the United States.

A)32; 59
B)62; 32
C)48; 62
D)32; 38

Answer 1

A

Question 2

Supervision of the board of directors in its monitoring role is the responsibility of

A)the CEO.
B)the chairman of the board.
C)the chief operating officer.
D)the president.

Answer 2

B

Question 3

The most common organizational structure for implementing a corporate diversification strategy is the ________ structure.

A)matrix
B)U-form
C)M-form
D)functional

Answer 3

C

Question 4

The ________ is the subcommittee of the board of directors that is responsible for ensuring the accuracy of accounting and financial statements.

A)audit committee
B)finance committee
C)nominating committee
D)personnel and compensation committee

Question 5

Which component of the M-form structure evaluates the firm's decision making to ensure that it is consistent with the interests of equity holders?

A)senior executives
B)corporate staff
C)board of directors
D)division general managers

Question 6

The primary responsibility of the ________ is to provide information about the firm's external and internal environments to the firm's senior executive.

A)corporate staff
B)board of directors
C)division general managers
D)shared activity managers

Question 7

In an agency relationship,the party that delegates decision-making authority to another individual is known as the

A)stakeholder.
B)principal.
C)agent.
D)stockholder.

Question 8

Which role in the office of the president is responsible for strategy implementation?

A)chairman of the board
B)chief executive officer
C)chief operating officer
D)chief strategist

Question 9

Which of the following statements regarding outside members of boards of directors is accurate?

A)Outside directors,as compared to insiders,tend to focus less on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance.
B)Outside directors,as compared to insiders,tend to focus less on monitoring a firm's economic performance than on other measures of firm performance and are less likely than insider members to dismiss CEOs following poor performance.
C)Outside directors,as compared to insiders,tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are less likely than insider members to dismiss CEOs following poor performance.
D)Outside directors,as compared to insiders,tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance.

Question 10

Two common agency problems include

A)managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk aversion.
B)managers not investing enough of a firm's capital in managerial perquisites and managerial risk aversion.
C)managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk seeking.
D)managers not investing enough of a firm's capital in managerial perquisites and managerial risk seeking.

Question 11

In examining the question of whether the roles of CEO and chairman should be combined,empirical research on this question suggests

A)that combining these roles is always positively related with firm performance.
B)that separating these roles is always positively related with firm performance.
C)that combining these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments.
D)that separating these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments.

Question 12

The ________ is a subcommittee of the board of directors that maintains the relationship between the firm and external capital markets.

A)nominating committee
B)audit committee
C)personnel and compensation committee
D)finance committee

Question 13

The divided loyalties that divisional staff managers have between corporate staff managers and functional managers are potentially the most problematic in ________ staff functions.

A)marketing
B)accounting
C)logistics
D)production

Question 14

In a multidivisional structure,each business that the firm engages in is managed through a

A)product line.
B)division.
C)geographic unit.
D)function.

Question 15

Which of the following statements regarding institutional investors is accurate?

A)Institutional investors tend to be more interested in maximizing the short-term value of their portfolios than in the long-term performance of firms in those portfolios.
B)High levels of institutional ownership are negatively related to the level of R&D in a firm.
C)High levels of institutional ownership have a strong,positive relationship with the level of R&D in a firm.
D)High levels of institutional ownership lead firms to sell strategically unrelated businesses.

Question 16

The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with

A)the interests of all of its stakeholders.
B)an exclusively short-term perspective.
C)an exclusively long-term perspective.
D)the interests of its equity holders.

Question 17

The divisions of an M-form organization are true

A)profit-and-loss centers.
B)functional units.
C)matrix teams.
D)organic structures.

Question 18

A board of directors typically consists of

A)10 to 15 individuals drawn from a firm's top management group and from individuals outside the firm.
B)10 to 15 individuals drawn exclusively from a firm's top management group.
C)10 to 15 individuals drawn exclusively from individuals outside the firm.
D)10 to 15 individuals drawn from all stakeholder groups associated with the firm.

Question 19

The senior executive (the president or CEO)in an M-form organization has two responsibilities:

A)budgeting and accounting.
B)budgeting and mission setting.
C)strategy formulation and strategy implementation.
D)strategy formulation and budgeting.

Question 20

In 2005,what percentage of the equity traded in the United States was owned by institutional investors?

A)20%
B)38%
C)59%
D)69%

Question 21

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

Question 22

When compared to the strategy implementation responsibilities of senior executives in U-form organizations,when implementing strategy,division general managers in M-form organizations

A)tend to have to deal with less conflict.
B)have to compete for external capital funding.
C)tend to have to deal with substantially more conflict.
D)must cooperate with other divisions to exploit corporate economies of scope.

Question 23

Another name for the M-form is the multidivisional structure.

Question 24

Which organizational structure is SpandoCorp using?

A)U-form
B)matrix
C)M-form
D)functional

Question 25

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.

Question 26

If Todd Heinz were the chief operating officer for SpandoCorp,his responsibilities would include

A)supervision of the board of directors in its monitoring role.
B)strategy implementation.
C)strategy formulation.
D)strategy control.

Question 27

All firms that use the multidivisional structure use the same criteria for defining the boundaries of profit-and-loss centers.

Question 28

In an M-form organization,the management of day-to-day operations is delegated to

A)divisional general managers and corporate staff managers.
B)corporate staff managers and functional managers who report to corporate staff managers.
C)divisional general managers and functional managers who report to division general managers.
D)the board of directors and corporate staff managers who report to the board of directors.

Question 29

Each division in an M-form organization typically adopts a matrix structure and the division general manager takes on the role of senior project executive.

Question 30

Wells Tucker's position in SpandoCorp is best described as

A)a division general manager.
B)a member of the corporate staff.
C)the senior executive.
D)a member of the board of directors.

Question 31

The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with the interests of its equity holders.

Question 32

Rather than having profit-and-loss responsibilities,________ are assigned a budget and manage their operations to that budget.

A)profit centers
B)cost centers
C)operation centers
D)functional centers

Question 33

The divisions in an M-form organization are true profit-and-loss centers.

Question 34

Grace McKenna is best described as a(n)________ in SpandoCorp.

A)senior executive
B)corporate staff member
C)division general manager
D)institutional investor

Question 35

________ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them.

A)Division general managers
B)Corporate staff managers
C)Senior executives
D)Shared activity managers

Question 36

When the cost of services from a shared activity is ________ the cost of comparable services provided by a division itself or by an outside supplier than the division,general managers have a strong incentive ________.

A)less than; to use the services of shared activities
B)greater than; to use the services of shared activities
C)less than; to use the services of an outside supplier
D)equal to; to use the services of an outside supplier

Question 37

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

Question 38

In the multidivisional structure,each business that the firm engages in is managed through a division.

Question 39

Whenever one party to an exchange delegates decision-making authority to a second party,an agency relationship has been created between these parties.

Question 40

Kelly Rae's position is SpandoCorp is best described as a(n)

A)institutional investor.
B)senior executive.
C)division general manager.
D)member of the board of directors.

Question 41

In 1970,institutions owned 62 percent of the equity traded in the United States; by 1990,institutions owned 48 percent of this equity and by 2005,they owned only 32 percent of this equity.

Question 42

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

Question 43

Institutional owners are usually pension funds,mutual funds,insurance companies,or other groups of investors that have joined together to manage their investments.

Question 44

Discuss the role of division general managers in an M-form organization and compare and contrast this role with that of senior executives in U-form organizations.

Question 45

Discuss the role of institutional investors in an M-form organization.In addressing this question,be sure to identify who institutional investors are and discuss trends in institutional ownership and whether institutional investors encourage managers to act in ways that are consistent with the interests of equity holders or if institutional investors are overly myopic.

Question 46

________ is an economic measure of divisional performance.

A)Return on assets
B)Return on a division's sales
C)Economic value added
D)A division's growth rate

Question 47

Research has shown that separating the roles of CEO and board chair is positively correlated with firm performance when firms operated in high-growth and very complex environments.

Question 48

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.

Question 49

One common agency problem occurs when managers decide to take some of a firm's capital and invest it in managerial perquisites that do not add economic value to the firm but that do directly benefit those managers.

Question 50

To the extent that a board of directors begins to operate a business on a day-to-day basis,it goes beyond its capabilities.

Question 51

Managerial risk aversion is not as important in diversified firms where risk is distributed.

Question 52

Define what constitutes an agency relationship and the roles of the principal and the agent; discuss how the agency relationship is reflected in the context of corporate diversification and when the agency relationship can be effective; and identify two common agency problems.

Question 53

Research on outside members of boards of directors tends to show that outside directors,as compared to insiders,tend to focus less on monitoring a firm's economic performance than on other measures of firm performance.

Question 54

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

Question 55

In an M-form organization the role of the board of directors is to formulate corporate strategies consistent with equity holders' interests and to assure strategy implementation.

Question 56

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.

Question 57

Identify the responsibilities of the senior executive in an M-form organization and discuss the three different roles in the office of the president and the responsibilities of each role.

Question 58

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

Question 59

The greatest risk associated with treating shared activities as profit centers is that divisions may choose to obtain no services from the shared activities.

Question 60

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

Question 61

Which of the following is a weakness of using a hurdle rate as a standard of evaluating the performance of a division?

A)The process is time-consuming.
B)The process is fraught with political intrigue.
C)This approach lets other firms determine what is and what is not excellent performance for a division within a diversified firm.
D)The use of such a single standard ignores important differences in performance that might exist across divisions.

Question 62

Most accounting measures of divisional performance have a common limitation in that they

A)have a short-term bias.
B)are costly to implement.
C)are difficult to interpret.
D)have a long-term bias.

Question 63

If the bulk materials division of SpandoCorp sold its reams of Spandex to the military division and set the transfer price of these reams equal to the bulk materials actual cost of production,SpandoCorp would be using the ________ transfer pricing scheme.

A)exchange autonomy
B)mandated full cost
C)mandated market based
D)dual pricing

Question 64

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.

A)zero-based
B)cost plus
C)dynamic
D)traditional

Question 65

Economic theory tells us that transfer prices should equal ________ cost.

A)marginal
B)variable
C)fixed
D)opportunity

Question 66

Some scholars suggest that the search for optimal transfer pricing should be abandoned in favor of setting transfer pricing as a(n)________ process.

A)negotiation
B)arbitrary
C)conflict resolution
D)marketing

Question 67

If SpandoCorp wanted to measure the performance of its divisions with a method that would minimize any potential short-term bias,it should use a(n)

A)hurdle rate based measure of divisional performance.
B)divisional budget based measure of performance.
C)economic value added measure of divisional performance.
D)measure of performance based on the average level of profitability of firms in a division's industry.

Question 68

In a multidivisional company,one division "sells" its products or services to a second division for a(n)________,which is set by a firm's corporate management to accomplish corporate objectives.

A)allocation price
B)transfer cost
C)market price
D)transfer price

Question 69

Transfer pricing should equal

A)selling price.
B)opportunity cost.
C)total cost.
D)marginal cost.

Question 70

Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits.

Question 71

One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate,there is little ambiguity about the performance objectives of divisions.

Question 72

If a division of a multidivisional firm has adjusted accounting earnings of $10 million,a weighted average cost of capital of 10% and a total capital employed by the division of $50 million,the division has an EVA of

A)$25 million.
B)$5 million.
C)$15 million.
D)$20 million.

Question 73

In ________ budgeting,corporate executives create a list of all capital allocation requests from divisions in a firm,rank them from "most important" to "least important" and then fund all the projects a firm can afford,given the amount of capital that is available and no project receives funding simply because it was funded in the past.

A)cost-plus
B)activity-based
C)zero-based
D)revenue-based

Question 74

Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

Question 75

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

Question 76

Under which transfer pricing scheme is the transfer price set equal to the selling division's actual cost of production or set equal to the cost of production if the selling division were operating at maximum efficiency?

A)exchange autonomy
B)mandated full cost
C)mandated market based
D)dual pricing

Question 77

Economic measures of divisional performance in a diversified firm compare a division's performance with a firm's cost of capital and these measures increase the potential for gaming,which is generally minimized by accounting measures.

Question 78

Which of the following is not an alternative transfer-pricing scheme?

A)exchange autonomy
B)mandated full cost
C)solo pricing
D)mandated market based

Question 79

When adjusting a division's accounting earnings for use in the economic value added calculations,R&D spending is usually

A)subtracted from the division's performance.
B)depreciated over the life of the average R&D projected and subtracted from the division's performance.
C)amortized over the life of the average R&D projected and added back to the division's performance.
D)added back into the division's performance.

Question 80

By adjusting for a division's earnings and accounting for the cost of investing in a division,economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.