BMGT495 - Exam II - Chapter 8

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Organizational structure, controls, and compensation policies should address what fundamental Strategy Implementation problem? How can the interests of employees be aligned with the interests of the firm?
Identify and define the rationality that is attributed to the complexity of large organizations. Bounded: people are bounded in their rationality (satisficing)
Define satisficing. People will make decisions that are "good enough" even though they can't make absolutely maximizing decisions
What is the implication between satisficing and bounded rationality? Lower-quality decisions will result when information processing requirements grow beyond the managers' bounded rationality
What is the main tradeoff in a firm's agency relationships? There is tradeoff b/w making info processing more manageable & creating a separation of principals and agents
How should the M-form structure be aligned, in terms of the agency relationship? Should be organized such that the interests of principals and agents are aligned
Identify the 4 aligning incentives, ranked from Short Time Horizon/Not Tied to Performance to Long Time Horizon/Tied to Performance Salary, Cash Bonus, Stock Grants, Stock Options
Identify and describe the most common organization structure for implement a corporate diversification strategy. M-form (multidivisional): Board > Senior Exec > Finance-Legal-Acctng-R&D-Sales-HR > Division General Mgrs > Division
What are the monitoring roles or responsibilities of the Board of Directors? Monitor decision making in a firm to ensure that it's consistent w/ the interest of outside equity holders
What are the monitoring roles or responsibilities of the Institutional Investors? Monitor decision making to ensure that it's consistent w/ the interests of major intitutional equity investors
What are the monitoring roles or responsibilities of the Senior Executives? Formulate corporate strategies consistent w/ equity holders' interests & assure strategy implementation
What are the strategy formulation responsibilities of the Senior Executive? Decide the biz's which the firm will operate, Decide how the firm should compete in those biz's, Specify the EoSc which the firm will operate
What are the strategy implementation responsibilities of the Senior Executive? Encourage cooperation across divisions to exploit EoSc's; Evaluate performance of divisions; Allocate capital cross divisions
What are the monitoring roles or responsibilities of the Corporate Staff? Provide information to the senior executive about internal & external environments for strategy formulation & implementation
What are the monitoring roles or responsibilities of the Division General Managers? Formulate divisional strategies consistent w/ corporate strategies & assure strategy implementation
What are the strategy formulation responsibilities of the Division General Managers? Decide how the division will compete in its business, given the corporate strategy
What are the strategy implementation responsibilities of the Division General Managers? Coordinate decisions of funct. mgrs reporting to DGM to implement div strategy; Compete for corporate capital allocations; Exploit EoSc's
What are the monitoring roles or responsibilities of the Shared Activity Managers? Support the operations of multiple divisions
Identify the different subcommittees typically organized within a Board of Directors. Committe: Audit (F/S accuracy), Finance (r-ship b/w firm & ext. cap mkts), Nominating (New Board memb), Personnel/Compensation
Define institutional owners. Pension funds, mutual funds, insurance cos., etc that joined together to manage their investments
What is the effect of institutional investors on the firm? Insist that mgmt behaves in ways constistent w/ interests of EH's; Firms tend to sell strategically unrelated biz's; "Only concerned w/ ST"
What is the fundamental competition and cooperation between managers? Compete for corporate capital, Cooperate with other divisions to exploit corporate economies of scope
How do managers compete for corporate capital? Promising high rates of return on capital invested by the corp. in their business
How do managers cooperate to exploit corporate economies of scope? Working w/ shared activity mgrs, corporate staff mgrs, & senior execs to isolate & use the EoSc around which the firm was originally organized
Why is competition between managers for corporate capital important? It leads division general managers to focus on generating high levels of eceonomic performance from their divisions
Why is cooperation between managers to exploit corporate economies of scope important? If divisions don't cooperate in exploiting the EoSc's, there's no reason for implementing corporate diversification strategy
Identify and define the manner in which shared activities are most often managed. Cost Centers: assigned a budget & manage their operations to that budget; shared mgrs don't try to make profit
What characteristics identify a well managed cost center? The cost of services from a shared activity is less than the cost of comparable services provided by a division itself or ext. suppl.
What are the two ways to measure divisional performance? Accounting measures and Economic measures
Describe the accounting measurers of divisional performance. Division's return on sales, sales growth, roa, compared with different standards: Common hurdle rate, Div's budgeted lvl, Avg lvls of div
What is the strength & weakness of using the common hurdle rate as an accounting standard of comparison? S: Little ambiguity about performance objectives; W: Ignores important differences in performance that might exist across divisions
What is the strength & weakness of using a division's budgeted performance as an accounting standard of comparison? S: Allows for varying performance expectations; W: time-consuming & political
What is the strength & weakness of using a division's average levels as an accounting standard of comparison? S: Allows for varying performance expectations; W: Lets other firms determine what is/isn't excellent div performance
Describe the economic measures of divisional performance. Adjusts acctg methods to incorp. ST invest. that may bring LT benefits; EVA
Define economic value added (EVA). Substracting cost of capital employed in a division from that division's earnings; Applies financial theory rather than stndard of compar.
Which of the two measures of divisional performance more accurate? Economic measures
What is the primary limitation of internal capital market allocation? Division general managers have strong incentive to overstate their division's prospects & understate its problems to gain more capital
What is the solution to division general managers overstating their prospects and understating their problems to gain more capital? 0-Based Budgeting: Execs make list of all cap. allocation requests, rank them, then fund all the projects firm can afford
What are the limitations of Zero-based budgeting? Evaluating & ranking all projects fairly is hard; Requires execs to have complete knowledge of the strategic role of each request
Describe the exchange autonomy alternative transfer pricing scheme. Buying & Selling division general mgrs are free to negotioate xfer price w/o corp. involvement; Xfer price = selling div's price to ext.
Describe the mandated full cost alternative transfer pricing scheme. Xfer price = selling div's actual cost of production; Xfer price = selling div's standard cost (cost of production if sell div @ max)
Describe the mandated market based alternative transfer pricing scheme. Xfer price = market price in selling division's market
Describe the dual pricing alternative transfer pricing scheme. Xfer price for buying div = selling div's actual/standard cost; Xfer price for selling div = price to ext. customers or to sell div's mkt price
What is the weakness of the buying & selling divisions negotiating their own transfer price? Haggling costs; Corp. risks not exploiting EoSc if right xfer price can't be negotiated
What is the weakness of the transfer price set equal to the selling division's price to external customers? Different customers different prices, Xfer price should be lower than this, Since selling div has no mktg expenses price should be lower
What is the weakness of the transfer price set equal to the selling division's actual costs? Who determines the "actual" costs, Which costs are relevant to the selling div's "actual" costs
What is the weakness of the transfer price set equal to the selling division's standard costs? Since standard costs are costs the selling div would incur at max efficiency, this hypothetical capacity subsidizes the buying div
What is the weakness of the transfer price set equal to the market price? If product is highly differentiated, no easy "mkt price"; No mktg expenses so price should be lower
What is the weakness of the transfer price set equal to actual costs for the selling division and to market price for the buying division? This combo of schemes combines other problems of setting transfer prices
How connected is the compensation of corporate managers in a diversified firm with the firm's economic performance? Very little connection
What is the common inclusion of compensation for CEO's? Stock and stock options as part of the compensation package