Chapter 8: Rganizing To Implement Corporate Diversification
Questions and Answers
- 1.
The most common organization structure for implementing a corporate diversification strategy is the U-form.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The U-form organization structure is not the most common organization structure for implementing a corporate diversification strategy. The most common structure for this strategy is the M-form, which allows for the creation of semi-autonomous business units that focus on different markets or industries. The M-form structure allows for more flexibility and specialization, which is important in a diversification strategy.Rate this question:
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- 2.
Another name for the M-form is the multidivisional structure.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The M-form is indeed another name for the multidivisional structure. This organizational structure is characterized by the division of a company into semi-autonomous divisions or business units, each with its own functional departments. This allows for greater specialization and focus within each division, as well as more effective coordination and control at the corporate level. The M-form is commonly used by large corporations operating in diverse industries or markets.Rate this question:
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- 3.
In the multidivisional structure, each business that the firm engages in is managed through a division.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because in a multidivisional structure, each business that the firm engages in is managed through a separate division. This structure allows for greater specialization and focus within each division, as well as increased efficiency and accountability. Each division operates semi-autonomously, with its own resources, goals, and management team. This structure is commonly used by large corporations that have multiple lines of business or operate in different industries.Rate this question:
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- 4.
The divisions in an M-form organization are true profit-and-loss centers.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In an M-form organization, divisions are true profit-and-loss centers. This means that each division is responsible for its own profits and losses and has the authority to make decisions that directly impact its financial performance. This decentralized structure allows divisions to have more autonomy and accountability, which can lead to better decision-making and efficiency.Rate this question:
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- 5.
All firms that use the multidivisional structure use the same criteria for defining the boundaries of profit-and-loss centers.
- A.
True
- B.
False
Correct Answer
B. False -
- 6.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In an M-form organization, divisions should be large enough to represent distinct business entities. This means that each division should have its own set of resources, functions, and responsibilities. However, divisions should also be small enough for the division general manager to effectively manage them. This ensures that the manager can have a clear understanding of the division's operations and make informed decisions. Therefore, the statement is true as it highlights the importance of balancing the size of divisions in an M-form organization.Rate this question:
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- 7.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In an M-form organization, each division does not typically adopt a matrix structure. Instead, each division operates independently with its own functional structure. The division general manager is responsible for overseeing the division's operations and does not necessarily take on the role of a senior project executive. Therefore, the correct answer is false.Rate this question:
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- 8.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The M-form structure is a type of organizational structure that is designed to create checks and balances for managers. This means that there are systems in place to ensure that managers are held accountable and that their actions align with the interests of the company's equity holders. This structure is particularly important for diversified firms, as it helps to prevent managers from pursuing their own interests at the expense of the shareholders. Therefore, the statement that the M-form structure increases the probability that a diversified firm will be managed in ways consistent with the interests of its equity holders is true.Rate this question:
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- 9.
Whenever one party to an exchange delegates decision-making authority to a second party, an agency relationship has been created between these parties.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
An agency relationship is formed when one party (the principal) gives decision-making authority to another party (the agent). This means that the agent is authorized to act on behalf of the principal and make decisions on their behalf. Therefore, the statement is true as it correctly states that whenever decision-making authority is delegated, an agency relationship is created.Rate this question:
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- 10.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In an M-form organization, the role of the Board of Directors is not solely to formulate corporate strategies consistent with equity holders' interests and to assure strategy implementation. While the Board does play a role in strategy formulation and implementation, its responsibilities extend beyond that. The Board is also responsible for overseeing the overall management of the organization, including appointing and evaluating top executives, monitoring financial performance, and ensuring compliance with laws and regulations. Therefore, the statement is false.Rate this question:
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- 11.
In an agency relationship the party delegating the decision making authority is called the agent.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In an agency relationship, the party delegating the decision-making authority is called the principal, not the agent. The agent is the party who acts on behalf of the principal and carries out the delegated tasks and decisions. Therefore, the given statement is incorrect.Rate this question:
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- 12.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
This statement is true because it describes a situation where managers use a firm's capital to benefit themselves personally, rather than adding value to the firm. This is known as an agency problem, where the interests of managers may not align with the interests of shareholders. By investing in managerial perquisites that do not add economic value to the firm but directly benefit managers, the managers are prioritizing their own interests over those of the firm and its shareholders.Rate this question:
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- 13.
In principle, only the CEO and the President report to the board of directors while other senior managers report only to the CEO.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because in many organizations, senior managers report directly to the board of directors, bypassing the CEO. This is especially true for positions such as Chief Financial Officer or Chief Technology Officer, where the board may want direct access and oversight. Additionally, in some cases, the President may also report directly to the board, depending on the organizational structure. Therefore, it is not accurate to say that only the CEO and the President report to the board of directors.Rate this question:
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- 14.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The research on outside members of boards of directors suggests that they tend to focus less on monitoring a firm's economic performance compared to insiders. This implies that outside directors prioritize other measures of firm performance over economic performance. Therefore, the correct answer is False.Rate this question:
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- 15.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The research suggests that when companies operate in high-growth and complex environments, separating the roles of CEO and board chair is associated with better firm performance. This implies that having different individuals in these positions allows for better decision-making and governance, as it prevents concentration of power and promotes checks and balances within the organization.Rate this question:
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- 16.
To the extent that a board of directors begins to operate a business on a day-to-day basis, it goes beyond its capabilities.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
When a board of directors starts to handle the day-to-day operations of a business, it exceeds its intended role and responsibilities. The primary function of a board of directors is to provide strategic guidance, make important decisions, and oversee the management team. By involving themselves in the day-to-day operations, the board may interfere with the expertise and knowledge of the management team, causing inefficiencies and confusion. Therefore, it is true that when a board of directors takes on operational tasks, it goes beyond its capabilities.Rate this question:
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- 17.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A board of directors does not typically consist of 15 to 30 individuals. The number of individuals on a board of directors can vary depending on the size and structure of the firm, but it is not typically within that range. Therefore, the statement is false.Rate this question:
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- 18.
The title chairman of the board often, but not always, identifies the firm's senior executive.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because the title chairman of the board does not always identify the firm's senior executive. While in many cases the chairman of the board may hold a senior executive position, this is not always the case. The chairman of the board is a leadership position within a company's board of directors, and their role is to preside over board meetings and provide guidance and oversight. The senior executive position within a company is typically held by the CEO or president. Therefore, the title chairman of the board does not necessarily identify the firm's senior executive.Rate this question:
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- 19.
Institutional owners are usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Institutional owners are indeed usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments. These entities have large amounts of capital and are able to invest in a wide range of assets. They often have professional investment managers who make decisions on behalf of the institution and its investors.Rate this question:
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- 20.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because the percentage of equity owned by institutions decreased over time, from 62 percent in 1970 to 48 percent in 1990 and then to 32 percent in 2002.Rate this question:
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- 21.
The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In an M-form organization, the senior executive is responsible for both strategy formulation and strategy implementation. This means that they are involved in developing the overall strategic direction of the organization and also ensuring that the strategies are effectively executed. This dual responsibility is crucial for the success of the organization as it allows for the alignment of strategic goals with operational actions. Therefore, the statement is true.Rate this question:
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- 22.
In an M-form organization, the chief executive officer is solely responsible for strategy implementation.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In an M-form organization, the chief executive officer is not solely responsible for strategy implementation. In fact, in an M-form organization, the responsibilities for strategy implementation are typically distributed among various department heads or managers. This is because an M-form organization is characterized by a multi-divisional structure, where each division operates semi-autonomously and has its own functional areas and managers. Therefore, the CEO's role in strategy implementation is more focused on setting the overall direction and coordinating the efforts of the different divisions, rather than being solely responsible for implementation.Rate this question:
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- 23.
Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
This statement is false because accounting measures of performance are not the only measures that can be used to accurately measure the performance of divisions within a diversified firm. Other measures such as market share, customer satisfaction, employee productivity, and innovation can also be used to assess the performance of divisions. Accounting measures may provide important financial information, but they do not capture the full picture of divisional performance.Rate this question:
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- 24.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Using a single hurdle rate in a diversified firm provides clarity and eliminates ambiguity in terms of performance objectives for divisions. This means that all divisions are evaluated against the same standard, making it easier to compare their performance and make informed decisions. It also ensures consistency in measuring divisional performance and aligns the divisions' goals with the overall corporate objectives. Therefore, the statement is true.Rate this question:
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- 25.
Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Accounting measures of divisional performance typically focus on both short-term and long-term benefits. While long-term benefits are important, short-term performance is also considered to assess the division's immediate financial health and efficiency. Therefore, the given statement is false as accounting measures do not solely minimize short-term bias.Rate this question:
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- 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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because economic methods of divisional performance in a diversified firm do indeed build on accounting methods. However, they also incorporate adjustments to account for short-term investments that may generate long-term benefits. This indicates that the economic methods take into consideration not only the immediate financial performance of a division but also the potential long-term gains that may result from certain investments. Therefore, the statement is correct.Rate this question:
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- 27.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Economic measures of divisional performance in a diversified firm do not compare a division's performance with a firm's cost of capital. Instead, economic measures focus on evaluating a division's profitability and return on investment. Accounting measures, on the other hand, are designed to minimize the potential for gaming or manipulation of financial results. Therefore, the statement that economic measures increase the potential for gaming is incorrect.Rate this question:
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- 28.
The most popular economically oriented measure of division performance in a diversified firm is economic value added.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Economic value added (EVA) is indeed the most popular economically oriented measure of division performance in a diversified firm. EVA is a financial metric that calculates the value a division adds to a company by subtracting the cost of capital from its net operating profit after taxes. It helps evaluate how effectively a division is utilizing its resources and generating profits. Many companies use EVA as a performance measure to assess the financial performance of their divisions and make strategic decisions. Therefore, the statement that EVA is the most popular measure of division performance in a diversified firm is true.Rate this question:
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- 29.
By adjusting for a division’s earning 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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Economic value added takes into account both the division's earnings and the cost of investing in the division, providing a more comprehensive measure of the division's economic performance. Traditional accounting measures may not consider the cost of investing and therefore may not accurately reflect the division's true economic performance. Therefore, the statement is true.Rate this question:
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- 30.
If a well-managed diversified firm uses both accounting and economic measures it will be able to unambiguously evaluate divisional performance.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The use of both accounting and economic measures does not guarantee unambiguous evaluation of divisional performance. Accounting measures focus on financial performance and may not capture the full economic value created by a division. Economic measures, on the other hand, consider factors such as opportunity costs and external market conditions. Therefore, the use of both measures may provide a more comprehensive evaluation, but it does not ensure unambiguous results.Rate this question:
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- 31.
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 division in that firm.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because even if a firm exploits real economies of scope in implementing a diversification strategy, it may still face challenges in evaluating the performance of individual divisions. This is because there could be various factors influencing the performance of each division, such as market conditions, competition, and management decisions. Additionally, the interdependencies between divisions can make it difficult to isolate the impact of each division on overall performance. Therefore, the evaluation of individual division performance may not be unambiguous.Rate this question:
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- 32.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Zero-based budgeting is a budgeting approach where each project is evaluated and funded based on its own merits, regardless of whether it received funding in the past. This means that no project automatically receives funding for the future just because it received funding in the past. Therefore, the statement is true.Rate this question:
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- 33.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Intermediate products or services are indeed those products or services that are produced in one division of a diversified firm and used as inputs by another division. This helps in streamlining the production process and ensuring efficient use of resources within the company.Rate this question:
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- 34.
In a diversified firm, market prices are the set by a firm’s corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In a diversified firm, market prices are determined by the market forces of supply and demand, just like transfer prices. Both market prices and transfer prices are influenced by market forces and not set by a firm's corporate management to accomplish corporate objectives. Therefore, the statement is false.Rate this question:
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- 35.
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.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The explanation for the given correct answer is that when choosing a transfer pricing system, a firm should prioritize selecting a transfer-pricing policy that creates the fewest management problems rather than focusing on finding the "right" transfer-pricing mechanism. This is because transfer pricing can be a complex and challenging process, and the main goal should be to minimize any potential issues or conflicts that may arise from the chosen policy. Therefore, the statement is true.Rate this question:
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- 36.
Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm’s economic performance.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement suggests that in the past, the compensation of corporate managers in a diversified firm was not strongly linked to the firm's economic performance. This implies that there was a loose connection between the two factors.Rate this question:
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- 37.
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.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The explanation for the answer "False" is that the study found that CEO cash compensation is actually responsive to differences in firm performance, even if a substantial percentage of their compensation is in the form of stock and stock options. This means that CEOs are being rewarded or penalized based on how well their company performs financially.Rate this question:
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- 38.
A firm pursuing an international strategy that uses a decentralized federation structure delegates strategic and operational decisions to those operational entities that maximize responsiveness to local conditions and international integration.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The given statement is false because a firm pursuing an international strategy that uses a decentralized federation structure does not delegate strategic and operational decisions to operational entities. Instead, it allows each operational entity to make decisions independently based on local conditions and international integration.Rate this question:
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- 39.
A firm pursuing an international strategy that uses a coordinated federation structure organizes each country as a full profit-and-loss center and delegates operational decisions to division general mangers or country presidents but reserving broader strategic decisions for corporate headquarters.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The explanation for the given correct answer is that in a firm pursuing an international strategy using a coordinated federation structure, each country is organized as a full profit-and-loss center. This means that each country operates as its own entity and is responsible for its own financial performance. Operational decisions are delegated to division general managers or country presidents, allowing for a level of autonomy and local decision-making. However, broader strategic decisions are still made at the corporate headquarters, ensuring that the overall strategy aligns with the company's goals and objectives. Therefore, the statement is true.Rate this question:
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- 40.
A firm pursuing an international strategy that uses a centralized hub structure retains strategic and operational decisions at headquarters.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
A firm pursuing an international strategy that uses a centralized hub structure retains strategic and operational decisions at headquarters. This means that the firm's headquarters is responsible for making important decisions regarding the company's overall strategy and day-to-day operations. This centralized approach allows for better coordination and control over the firm's international activities, ensuring consistency and alignment with the firm's overall objectives. By retaining decision-making authority at headquarters, the firm can effectively manage its global operations and adapt to changing market conditions.Rate this question:
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