Deck 8: Organizing to Implement Corporate Diversification

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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 2002, they owned only 32 percent of this equity.

Question 9

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 10

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 11

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 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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 20

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 21

Corporate spin-offs are different from asset divestitures.

Question 22

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

Question 23

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 24

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

Question 25

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 26

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 27

Transfer prices should equal opportunity cost.

Question 28

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

Question 29

Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance.

Question 30

Intermediate products or services are those products or services that are produced in one division of a diversified firm that are used as inputs by another division.

Question 31

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.

Question 32

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

Question 33

In choosing which transfer pricing system to use, a firm should be less concerned about finding the "right" transfer-pricing mechanism and be more concerned about choosing a transfer-pricing policy that creates the fewest management problems.

Question 34

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 35

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.

Question 36

An important study on executive compensation found that differences in CEO cash compensation is not very responsive to differences in firm performance even if a substantial percentage of the CEO's compensation came in the form of stock and stock options in the firm.

Question 37

In a diversified firm, market prices are set by a firm's corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand.

Question 38

In zero-based budgeting, each project has to stand on its own merits each year by being included among the important projects that a firm can afford to fund and no project receives funding for the future simply because it received funding in the past.

Question 39

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.

Question 40

If a well-managed diversified firm uses both accounting and economic measures, it will be able to unambiguously evaluate divisional performance.

Question 41

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 42

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 43

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

Question 44

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 45

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 46

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

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

Question 47

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 48

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.

Question 49

The divisions of an M-form organization are True

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

Question 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

Which of the following is not a reason that diversified firms might spin off businesses?

A) Management may require specific skills that are not present.
B) Anticipated economies of scope may not be realized.
C) Funding may be needed for other businesses.
D) The business is too related to other firm businesses.

Question 63

________ 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 64

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 65

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 66

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 67

________ 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 68

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.

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

Question 69

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 70

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 71

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 72

A business unit within a diversified firm may be sold to the public through a(n)

A) corporate spin-off.
B) liquidation.
C) IPO.
D) harvest strategy.

Question 73

A(n) ________ occurs when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent unit.

A) harvest
B) liquidation
C) initial public offering
D) corporate spin-off

Question 74

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 75

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 76

Transfer pricing should equal

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

Question 77

Which of the following statements regarding CEO compensation is accurate?

A) Differences in CEO cash compensation are very responsive to differences in firm performance.
B) If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are closely linked with changes in firm performance.
C) If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are not closely linked with changes in firm performance.
D) If a substantial percentage of a CEO's compensation comes in the form of salary, changes in compensation can be expected to be closely linked with changes in firm performance.

Question 78

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.
Which organizational structure is SpandoCorp using?

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

Question 79

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 80

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