This Document Contains Chapters 9 to 10 Chapter 09 Strategic Control and Corporate Governance True/False Questions 1. Strategic control systems, both informational and behavioral, are used to correct the performance and ultimate strategy of a firm. Answer: True Rationale: Strategic control is the process of monitoring and correcting the strategy and performance of a firm. Two central aspects of strategic control are informational control (the ability to respond effectively to environmental change) and behavioral control (the appropriate balance and alignment among the culture, rewards, and boundaries of a firm). 2. Behavioral controls involve the ability to respond effectively to environmental change. Answer: False Rationale: Strategic control is the process of monitoring and correcting the strategy and performance of a firm. Two central aspects of strategic control are informational control (the ability to respond effectively to environmental change) and behavioral control (the appropriate balance and alignment among the culture, rewards, and boundaries of a firm). 3. Informational controls involve the balance and alignment of the culture, rewards, and boundaries of a firm. Answer: False Rationale: Strategic control is the process of monitoring and correcting the strategy and performance of a firm. Two central aspects of strategic control are informational control (the ability to respond effectively to environmental change) and behavioral control (the appropriate balance and alignment among the culture, rewards, and boundaries of a firm). 4. The traditional approach to strategic control is interactive, while the contemporary approach to strategic control is sequential. Answer: False Rationale: The traditional approach to strategic control is sequential while in the contemporary approach the relationships between strategy formulation, implementation, and control are highly interactive. 5. The traditional approach to strategic control relies on feedback from performance measurement to formulate strategy. Answer: True Rationale: The traditional approach to strategic control is based on a feedback loop from performance measurement to strategy formulation. This process typically involves lengthy time lags, often tied to the annual planning cycle of a firm. 6. For firms competing in highly unstable and turbulent industries, traditional strategic controls are most appropriate. Answer: False Rationale: Traditional control systems are most appropriate when the environment is stable and relatively simple, goals and objectives can be measured with a high level of certainty, and there is little need for complex measures of performance. 7. Sales quotas, operating budgets, and production schedules are examples of traditional controls. Answer: True Rationale: Traditional control systems include sales quotas, operating budgets, production schedules, and similar quantitative control mechanisms. 8. In single loop learning, the assumptions, premises, goals, and strategies of the organization are continuously monitored, tested, and reviewed. Answer: False Rationale: The traditional approach to strategic control is based on a feedback loop from performance measurement to strategy formulation. Such traditional control systems, termed single-loop learning by Chris Argyris of Harvard University, simply compare actual performance to a predetermined goal. 9. Contemporary strategic controls involve comparing actual performance to predetermined goals. Answer: False Rationale: Traditional control systems, termed single-loop learning by Chris Argyris of Harvard University, simply compare actual performance to a predetermined goal. 10. Informational control is primarily concerned with whether or not the organization is doing the right things. Answer: True Rationale: There are two different types of strategic control in the contemporary approach: informational control and behavioral control. Informational control is primarily concerned with whether or not the organization is doing the right things. 11. Continuous monitoring enhances the ability of the organization to respond with speed and flexibility. Answer: True Rationale: In the contemporary approach to strategic control, there is double-loop learning in which the assumptions, premises, goals, and strategies of the firm are continuously monitored, tested, and reviewed. Time lags are dramatically shortened, changes in the competitive environment are detected earlier, and the ability of the organization to respond with speed and flexibility is enhanced. 12. As firms downsize, a control system based on rewards and culture becomes dysfunctional. Answer: False Rationale: As firms simultaneously downsize and face the need for increased coordination across organizational boundaries, a control system based primarily on rigid strategies, rules, and regulations is dysfunctional. The use of rewards and culture to align individual and organizational goals becomes increasingly important. 13. For young managers who see themselves as free agents, behavioral controls such as rewards and culture can be an effective way to enhance organizational loyalty. Answer: True Rationale: Younger managers today have been conditioned to see themselves as free agents and view a career as a series of opportunistic challenges. As managers are advised to specialize, market yourself, and have work, if not a job, the importance of culture and rewards in building organizational loyalty claims greater importance. 14. Once a strong and healthy organizational culture has been established, it becomes self-sustaining. Answer: False Rationale: Powerful organizational cultures just do not happen overnight, and they do not remain in place without a strong commitment, both in terms of words and deeds, by leaders throughout the organization. 15. The collective sum of individual behaviors of the employees of an organization generally results in what is best for the organization; thus, individual rationality assures organizational rationality. Answer: False Rationale: Generally speaking, people in organizations act rationally, each motivated by their personal best interest. However, the collective sum of individual behaviors of employees of an organization does not always result in what is best for the organization; individual rationality is no guarantee of organizational rationality. 16. The organizational reward system is typically a weak method for motivating employees. Answer: False Rationale: Reward and incentive systems represent a powerful means of influencing organizational culture, focusing efforts on high-priority tasks, and motivating individual and collective task performance. 17. Different functional areas within an organization often have different reward systems. Answer: True Rationale: As corporations grow and evolve, they often develop different business units with multiple reward systems. They may differ based on industry contexts, business situations, stage of product life cycles, and so on. Subcultures within organizations may reflect differences among functional areas, products, services, and divisions. 18. Rewards systems that reinforce the core values of the organization and contribute to organizational cohesiveness are the least effective type. Answer: False Rationale: To be effective, incentive and reward systems need to reinforce basic core values, enhance cohesion and commitment to goals and objectives, and meet with the overall mission and purpose of the organization. 19. For a reward system to be effective, it must be perceived as fair and equitable. Answer: True Rationale: Effective reward and incentive systems share a number of common characteristics. The perception that a plan is fair and equitable is critically important. 20. Boundaries and constraints are just used to maintain order in an organization and have little effect on the strategic priorities of the organization. Answer: False Rationale: Boundaries and constraints play a valuable role in focusing company strategic priorities. For example, several years ago, IBM sold off its PC business as part of its desire to focus its business on computing services. Similarly, Pfizer sold its infant formula business as it refocused its attention on core pharmaceutical products. 21. Short-term objectives and action plans are types of boundaries that channel the efforts of employees toward goal accomplishment. Answer: True Rationale: Short-term objectives and action plans represent boundaries that help to allocate resources in an optimal manner and to channel the efforts of employees at all levels throughout the organization. 22. Unexpected events have little effect on short-term objectives, because short-term objectives are not changeable. Answer: False Rationale: Short-term objectives must provide proper direction and also provide enough flexibility for the firm to keep pace with and anticipate changes in the external environment, new government regulations, a competitor introducing a substitute product, or changes in consumer taste. 23. Action plans permit a degree of autonomy for managers who sometimes must modify activities to achieve the desired outcome. Answer: True Rationale: Short-term objectives must provide proper direction and also provide enough flexibility for the firm to keep pace with and anticipate changes in the external environment. Unexpected events within a firm may require a firm to make important adjustments in both strategic and short-term objectives. 24. Boundaries and constraints, when used properly, can minimize improper and unethical conduct. Answer: True Rationale: Boundaries and constraints can serve many useful purposes for organizations, including minimizing improper and unethical conduct. Guidelines can be useful in specifying proper relationships with customers and suppliers of the company. Many companies have explicit rules regarding commercial practices, including the prohibition of any form of payment, bribe, or kickback. 25. Rule-based controls are appropriate in organizations, where most of the employees are unskilled. Answer: True Rationale: Control in bureaucratic organizations is dependent on members following a highly formalized set of rules and regulations. Most activities are routine and the desired behavior can be specified in a detailed manner because there is generally little need for innovative or creative activity. 26. The primary participants in corporate governance, according to Monks and Minow, are the shareholders, board of directors, and employees. Answer: False Rationale: Robert Monks and Nell Minow, two leading scholars in corporate governance, define it as the relationship among various participants in determining the direction and performance of corporations. The primary participants are the shareholders, the management (led by the CEO), and the board of directors. Agency theory is concerned with resolving two problems that can occur in agency relationships. The first is the agency problem that arises when the goals of the principals and agents conflict and when it is difficult or expensive for the principal to verify what the agent is actually doing. 27. Central to agency theory is the relationship between two primary players, the principals (stockholders) and agents (management). Answer: True Rationale: Central to agency theory is the relationship between two primary players, the principals who are the owners of the firm (stockholders) and the agents, who are the people paid by principals to perform a job on their behalf (management). 28. Research has shown that executives who have large holdings of stock in their firm were more likely to have diversification strategies more consistent with shareholder interests, like increasing long-term returns. Answer: True Rationale: Agents (executives) may have a stronger preference toward diversification than shareholders, because it reduces their personal level of risk from potential loss of employment. Executives who have large holdings of stock in their firms were more likely to have diversification strategies that were more consistent with shareholder interests, like increasing long-term returns. 29. One of the most critical roles of the board of directors is to create incentives that align the interests of the CEO and top executives with the interests of shareholders. Answer: True Rationale: Managerial incentives, sometimes called contract-based outcomes, consist of reward and compensation agreements for managers. Here the goal is to carefully craft managerial incentive packages to align the interests of management with those of the stockholders. 30. According to the Business Roundtable, representing the largest U.S. corporations, the most important quality of a good board of directors is that they do not get involved in critiquing company strategies. Answer: False Rationale: According to the Business Roundtable, the most important quality for a good board of directors is to be active, critical participants in determining company strategies. That does not mean board members should micromanage or circumvent the CEO. Rather, they should provide strong oversight going beyond simply approving the plans of the CEO. 31. In order to have effective board operations, firms need to cultivate engaged and committed boards. Answer: True Rationale: Research and simple observations of boards indicate that simple prescriptions, such as having a majority of outside directors, are insufficient to lead to effective board operations. Firms need to cultivate engaged and committed boards. 32. Changes in board of director configurations since 1987 indicate that board directors were paid more in 2011, were older, were likely to be female and were independent from the company (not insiders). Answer: True Rationale: According to a Harvard Business Review article in 2011, the percentage of boards that had an average age of 64 or older increased; the average pay for directors increased; the percentage of board members who were female increased; the percentage of boards with 12 or fewer members increased; and the percentage of directors who were independent increased. These changes resulted from regulator and investor efforts in response to financial crises and corporate scandals. 33. CalPERS, the California Public Employees Retirement System, manages over 240 billion dollars in assets. As an example of shared activism, they review all short- and long-term performance figures for each of the firms in which they invest and request changes in the governance structure of those firms, when they feel the firm is not responsive to their concerns. Answer: True Rationale: Shareholder activism refers to actions by large shareholders, both institutions and individuals, to protect their interests when they feel that managerial actions diverge from shareholder value maximization. Every year CalPERS reviews the performance of the 1,000 firms in which it retains a sizable investment. They review short- and long-term performance of each firm in its portfolio, its governance characteristics, its financial status, and market expectations for the firm. CalPERS then meets with selected companies to better understand their governance and business strategy. If needed, CalPERS requests changes in the governance structure of the firm and works to ensure shareholder rights. 34. When firms like Siebel Systems, Disney, Oracle, and Microsoft separated the roles of CEO and chairman of the board, they were creating CEO duality. Answer: False Rationale: CEO duality also serves to reinforce popular doubts about the legitimacy of the system as a whole and evokes images of bosses writing their own performance reviews and setting their own salaries. Firms like Siebel Systems, Disney, Oracle, and Microsoft have also decided to divide the roles between the CEO and chairman and eliminate duality. 35. The risk of being acquired by hostile raiders is often referred to as the takeover constraint. Answer: True Rationale: The risk of being acquired by a hostile raider is often referred to as the takeover constraint. The takeover constraint deters management from engaging in opportunistic behavior since the first thing that the raider may do on assuming control over the company will be to fire the underperforming management. 36. Auditors are appointed by the Securities and Exchange Commission to audit company financial statements. Answer: False Rationale: All accounting statements are required to be audited and certified to be accurate by external auditors. But auditors are appointed by the firm being audited. The desire to continue that business relationship sometimes makes them overlook financial irregularities. 37. Stock analysts generally issue more sell recommendations than buy recommendations. Answer: False Rationale: It is generally observed that analyst recommendations are often more optimistic than warranted by facts. Sell recommendations tend to be exceptions rather than the norm. Part of the explanation may be that most analysts work for firms that also have investment banking relationships with companies they follow. Negative recommendations may cause them to take their investment banking business to a rival firm. 38. Public companies are required by law to disclose information regarding executive compensation packages. Answer: True Rationale: All public corporations are required to disclose a substantial amount of financial information by bodies such as the Securities and Exchange Commission. These include quarterly and annual filings of financial performance, stock trading by insiders, and details of executive compensation packages. 39. The Sarbanes-Oxley Act of 2002 requires that CEOs and CFOs of publicly-listed companies must reveal off-balance-sheet finances and vouch for the accuracy of information provided. Answer: True Rationale: The failure of a variety of external control mechanisms led the U.S. Congress to pass the Sarbanes-Oxley Act in 2002. This act calls for many stringent measures that would ensure better governance of U.S. corporations. One of these measures is that CEOs and CFOs must fully reveal off-balance-sheet finances and vouch for the accuracy of the information revealed. 40. The Sarbanes-Oxley Act of 2002 stipulates that executives of a firm will still be able to sell their shares in the firm when other employees cannot. Answer: False Rationale: The failure of a variety of external control mechanisms led the U.S. Congress to pass the Sarbanes-Oxley Act in 2002. This act calls for many stringent measures that would ensure better governance of U.S. corporations. One of these measures is that executives must promptly reveal the sale of shares in firms they manage and are not allowed to sell when other employees cannot. 41. In emerging economies and continental Europe, principal-principal conflicts are frequent. These consist of conflicts between controlling shareholders and executives. Answer: False Rationale: In emerging economies and continental Europe there is often concentrated ownership, along with extensive family ownership and control, business group structures, and weak legal protection for minority shareholders. Serious conflicts tend to exist between two classes of principals: controlling shareholders and minority shareholders. Such conflicts can be called principal-principal (PP) conflicts. 42. Principal-principal (PP) conflicts frequently result in expropriation, which is defined as activities to enrich minority shareholders to assure their support. Answer: False Rationale: The result of PP conflict is often that family managers, who represent (or actually are) the controlling shareholders, engage in expropriation of minority shareholders, which is defined as activities that enrich the controlling shareholders at the expense of minority shareholders. Multiple Choice Questions 43. Behavioral controls are aspects of strategic change that involve finding the appropriate ______________ and ______________ among the culture, rewards, and boundaries of the firm. A. balance; alignment B. measure; balance C. alignment; balance D. measure; outcome Answer: A. balance; alignment Rationale: Strategic control is the process of monitoring and correcting the strategy and performance of a firm. Two central aspects of strategic control are informational control (the ability to respond effectively to environmental change) and behavioral control (the appropriate balance and alignment among the culture, rewards, and boundaries of a firm). 44. The traditional approach to strategic control is sequential. Which of the following is not one of the steps in the sequence? A. Action plans are submitted by lower level managers. B. Performance is measured against the predetermined goal. C. Strategies are implemented. D. Strategies are formulated and top management sets goals. Answer: A. Action plans are submitted by lower level managers. Rationale: The traditional approach to strategic control is sequential: (1) strategies are formulated and top management sets goals, (2) strategies are implemented, and (3) performance is measured against the predetermined goal set. 45. Which of the following is the primary drawback of traditional strategic control systems? A. They are only appropriate when the environment is stable and simple. B. Goals and objectives cannot be measured with a high level of certainty. C. They lead to complacency. D. They lack the flexibility needed to adjust to changes in the environment. Answer: D. They lack the flexibility needed to adjust to changes in the environment. Rationale: Some question the value of rigid planning and goal-setting processes. Fixed strategic goals also become dysfunctional for firms competing in highly unpredictable competitive environments. Strategies need to change frequently and opportunistically. An inflexible commitment to predetermined goals and milestones can prevent the very adaptability that is required of a good strategy. 46. For businesses facing complex and turbulent business environments, which of the following is true? A. Goals and objectives that are uncertain prevent opportunism. B. Traditional strategic controls are usually inappropriate. C. Complacency about predetermined milestones can prevent adaptability. D. Detailed plans are needed to maintain order. Answer: B. Traditional strategic controls are usually inappropriate. Rationale: Traditional control systems are most appropriate when the environment is stable and relatively simple, goals and objectives can be measured with a high level of certainty, and there is little need for complex measures of performance. 47. Contemporary approaches to strategic control rely primarily on _____________. A. feedback controls B. single-loop learning C. double-loop learning D. comparative learning Answer: C. double-loop learning Rationale: In the contemporary approach, information control is part of an ongoing process of organizational learning that continuously updates and challenges the assumptions that underlie the strategy of the organization. In such double-loop learning, the assumptions, premises, goals, and strategies of the organization are continuously monitored, tested, and reviewed. 48. Informational control systems are concerned with which of the following? A. Is the organization doing things right? B. Is the organization doing the right things? C. Are rules and regulations being followed as information is processed? D. Is the environment of the organization a necessary and sufficient condition for success? Answer: B. Is the organization doing the right things? Rationale: In the contemporary approach, there are two different types of strategic control: informational control and behavioral control. Informational control is primarily concerned with whether or not the organization is doing the right things. 49. Continuous monitoring, in the contemporary approach, is beneficial because _____________. A. it reduces time lags B. it increases the time it takes to detect changes in the competitive environment C. organizational flexibility is reduced D. organization response time is increased Answer: A. it reduces time lags Rationale: In the contemporary approach, information control is part of an ongoing process of organizational learning that continuously updates and challenges the assumptions that underlie the strategy of the organization. The benefits of continuous monitoring include: time lags are dramatically shortened; changes in the competitive environment are detected earlier; and the ability of the organization to respond with speed and flexibility is enhanced. 50. Which of the following is NOT one of the characteristics of a contemporary control system? A. It is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans. B. It must focus on constantly changing information that is strategically important. C. It circumvents the need for face-to-face meetings among superiors, subordinates, and peers. D. It generates information that is important enough to demand regular and frequent attention. Answer: C. It circumvents the need for face-to-face meetings among superiors, subordinates, and peers. Rationale: Contemporary control systems must have four characteristics to be effective: focus on constantly changing information that has potential strategic importance; the information is important enough to demand frequent and regular attention from all levels of the organization; the data and information generated are best interpreted and discussed in face to face meetings; and the control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans. 51. Top managers at ABC Company meet every Friday to review daily operational reports and year to date data. This is an example of _____________. A. behavioral control B. informational control C. strategy formulation D. strategy implementation Answer: B. informational control Rationale: In the contemporary approach, information control is part of an ongoing process of organizational learning and must have several characteristics, including that the information is important enough to demand frequent and regular attention from all levels of the organization, and the data and information generated are best interpreted and discussed in face-to-face meetings. 52. As firms simultaneously downsize and face the need for increased coordination across organizational boundaries, a control system based primarily on ______________ is dysfunctional. A. boundaries and constraints B. culture and rewards C. organizational loyalty D. innovation and risk taking Answer: A. boundaries and constraints Rationale: As firms simultaneously downsize and face the need for increased coordination across organizational boundaries, a control system based primarily on rigid strategies, rules, and regulations is dysfunctional. In this context, rules that specify behaviors that are acceptable and unacceptable are known as boundaries and constraints. 53. Which of the following is not an example of how organizational culture exerts behavioral control? A. Culture helps maintain control by creating behavioral norms. B. Culture generates unwritten standards of acceptable behavior. C. Culture encourages individual identification with the organization and its objectives. D. Culture sets explicit boundaries. Answer: D. Culture sets explicit boundaries. Rationale: Organizational culture is a system of shared values (what is important) and beliefs (how things work) that shape the people of a company, organizational structures, and control systems to produce behavioral norms (the way we do things around here). Culture sets implicit boundaries, unwritten standards of behavior, in dress, ethical matters, and the way an organization conducts its business. By creating a framework of shared values, culture encourages individual identification with the organization and its objectives. 54. The late Sam Walton, founder of Walmart, used to give pep rallies at local Walmart stores. What purpose did this serve? A. It was used to remind employees of Walmart rules and regulations. B. It helped reinforce and sustain the Walmart culture. C. It demonstrated to employees the importance of articulating explicit goals and objectives. D. It made the Walmart reward system very explicit. Answer: B. It helped reinforce and sustain the Walmart culture. Rationale: Rallies or pep talks by top executives also serve to reinforce the culture of a firm. The late Sam Walton was known for his pep rallies at local Walmart stores. 55. Which of the following is NOT one of the characteristics of reward and incentive systems? A. They represent a poor means of influencing the culture of an organization. B. They focus efforts on high priority tasks. C. They motivate high levels of individual and collective task performance. D. They represent an effective control mechanism. Answer: A. They represent a poor means of influencing the culture of an organization. Rationale: Reward and incentive systems represent a powerful means of influencing the culture of an organization, focusing efforts on high priority tasks, and motivating individual and collective task performance. Just as culture deals with influencing beliefs, behaviors, and attitudes of people within an organization, the reward system is an effective motivator and control mechanism by specifying who gets rewarded and why. 56. Individual rationality ______________ organizational rationality. A. is a good indicator of B. will ensure C. is often the opposite of D. does not always guarantee Answer: D. does not always guarantee Rationale: Generally speaking, people in organizations act rationally, each motivated by their personal best interest. However, the collective sum of individual behaviors of the employees of the organization does not always result in what is best for the organization; individual rationality is no guarantee of organizational rationality. 57. When subcultures emerge that have shared values opposite from the dominant culture of an organization _____________. A. organizational cohesiveness increases B. information is shared rather than hoarded C. individuals begin working at cross purposes D. individuals gain insights into overarching goals and objectives Answer: C. individuals begin working at cross purposes Rationale: Subcultures within organizations may reflect differences among functional areas, products, services, and divisions. To the extent that reward systems reinforce such behavioral norms, attitudes, and belief systems, cohesiveness is reduced; important information is hoarded rather than shared, individuals begin working at cross-purposes, and they lose sight of overall goals. 58. Which of the following is not a characteristic of effective reward and incentive systems? A. Performance measures are clear and highly visible. B. The structure is fixed to assure employees of consistency. C. The compensation system is perceived as fair and equitable. D. Objectives are well understood, and broadly accepted. Answer: B. The structure is fixed to assure employees of consistency. Rationale: Effective reward and incentive systems share a number of common characteristics. Among these are: objectives are clear, well understood, and broadly accepted; performance measures are clear and highly visible; the compensation system is perceived as fair and equitable; and the structure is flexible. It can adapt to changing circumstances. 59. Lack of a clear understanding of organizational goals and objectives is a probable cause of _____________. A. productive behavior B. counterproductive motivation C. counterproductive behavior D. motivated self-interest Answer: D. motivated self-interest Rationale: Counterproductive behavior can arise because of motivated self-interest, lack of a clear understanding of goals and objectives, or outright malfeasance. 60. Effective boundaries and constraints _____________. A. tend to inhibit efficiency and effectiveness B. distract employees who are trying to focus on organizational priorities C. minimize improper and unethical conduct D. tend to limit organizational growth Answer: C. minimize improper and unethical conduct Rationale: Boundaries and constraints can serve many useful purposes for organizations, including focusing individual efforts on strategic priorities, providing short-term objectives and action plans to channel efforts, improving efficiency and effectiveness, and minimizing improper and unethical conduct. 61. Effective short-term objectives should ______________ and _____________. A. be specific; measurable B. be achievable; not challenging C. be motivating; not limiting D. be time defined; not limiting Answer: A. be specific; measurable Rationale: To be effective, short-term objectives must have several attributes. They should be specific and measurable, include a specific time horizon for their attainment, and be achievable yet challenging enough to motivate managers who must strive to accomplish them. 62. Which of the following statements about action plans is true? A. Action plans, though specific, should permit a degree of autonomy to managers and not be constrained by budgets. B. Action plans must be specific so that managers will have a clear understanding of the resource requirements necessary to implement the plan. C. Action plans should not be constrained by a time frame in order to allow for modification. D. Although managers must be held accountable for implementing action plans, this accountability often erodes the managers' motivation to implement the plan on a timely basis. Answer: B. Action plans must be specific so that managers will have a clear understanding of the resource requirements necessary to implement the plan. Rationale: Unless action plans are specific, there may be little assurance that managers have thought through all of the resource requirements for implementing their strategies. In addition, unless plans are specific, managers may not understand what needs to be implemented or have a clear time frame for completion. 63. Rules and regulations are examples of ______________ and _____________. A. controls; behaviors B. controls; norms C. boundaries; behaviors D. boundaries; constraints Answer: D. boundaries; constraints Rationale: Boundaries and constraints are rules that specify behaviors that are acceptable and unacceptable. 64. The best way to minimize improper and unethical conduct is to ______________ and _____________. A. set boundaries; constraints B. establish standards; guidelines C. develop policies; regulations D. design sanctions; guidelines Answer: A. set boundaries; constraints Rationale: In an ideal world, a strong culture and effective rewards should be sufficient to ensure that all individuals and subunits work toward the common goals and objectives of the whole organization. However, this is not usually the case. Counterproductive behavior can arise because of motivated self-interest, lack of a clear understanding of goals and objectives, or outright malfeasance. Boundaries and constraints can serve many useful purposes for organizations, including: focusing individual efforts on strategic priorities; providing short-term objectives and action plans to channel efforts; improving efficiency and effectiveness; minimizing improper and unethical conduct. 65. Which of the following approaches to behavioral strategic control would be the least appropriate for an organization in which there is a great need for innovation and a high degree of autonomy? A. culture B. rewards C. rules D. incentives Answer: C. rules Rationale: Rules are most appropriate when associated with standardized output, tasks are generally repetitive and routine, and there is little need for innovation or creative activity. 66. Most successful organizations minimize the need for explicit rules, regulations, and other boundaries by _____________. A. posting written statements of the organizational goals and objectives B. discouraging the formation of subcultures that isolate work groups C. designing effective reward systems D. encouraging employees to see themselves as free agents Answer: C. designing effective reward systems Rationale: In most environments, organizations should strive to provide a system of rewards and incentives, coupled with a culture strong enough that boundaries become internalized. This reduces the need for external controls such as rules and regulations. 67. Rule-based controls are least appropriate in organizations with which one of the following characteristics? A. Environments are stable and predictable. B. Employees are highly skilled and independent. C. There is consistency in product and service. D. The risk of malfeasance is extremely high. Answer: B. Employees are highly skilled and independent. Rationale: Rule based controls are most appropriate in organizations with the following characteristics: environments are stable and predictable, employees are largely unskilled and interchangeable, consistency in product and service is critical, and the risk of malfeasance is extremely high. 68. Rules and regulations, rather than culture or rewards, would be used for strategic control at which type of company? A. software developer B. stock brokerage firm C. manufacturer of mass produced products D. high tech research facility Answer: C. manufacturer of mass produced products Rationale: Rule-based controls are most appropriate in organizations with the following characteristics: environments are stable and predictable, employees are largely unskilled and interchangeable, consistency in product and service is critical, and the risk of malfeasance is extremely high (e.g., in banking or casino operations). 69. Most organizations with strong cultures and a sound system of rewards and incentives can eventually internalize boundaries rather than use explicit rules and regulations. Which of the following is not a technique for moving in that direction? A. Hire people that identify with the dominant values of the organization. B. Develop managerial role models. C. Minimize training and indoctrination. D. Align reward systems with organizational goals and objectives. Answer: C. Minimize training and indoctrination. Rationale: In most environments, organizations should strive to provide a system of rewards and incentives, coupled with a culture strong enough that boundaries become internalized. This includes hiring people who identify with the dominant values of the organization and have consistent attributes, training, managerial role models, and reward systems that are clearly aligned with the organizational goals and objectives. 70. The primary participants in corporate governance do not include _____________. A. the shareholders B. the financial institutions C. the management (led by the chief executive officer) D. the board of directors Answer: B. the financial institutions Rationale: The primary participants in corporate governance are: the shareholders, the management (led by the CEO), and the board of directors. 71. In order to minimize the temptation for managers to act in their own self-interest, governance mechanisms exist for implementation consideration. Which of the following is not a primary means for monitoring managerial behavior? A. a board of directors that acts in the best interests of shareholders to create short-term value B. shareholder activism in which owners view themselves as shareowners C. a board of directors that acts in the best interests of shareholders to create long-term value D. managerial incentives to align management interests with those of the stockholders Answer: A. a board of directors that acts in the best interests of shareholders to create short-term value Rationale: First, there are two primary means of monitoring the behavior of managers which include: (1) a committed and involved board of directors that acts in the best interests of the shareholders to create long-term value and (2) shareholder activism, wherein the owners view themselves as shareowners instead of shareholders and become actively engaged in the governance of the corporation. Finally, there are managerial incentives, sometimes called contract-based outcomes, which consist of reward and compensation agreements. Here the goal is to carefully craft managerial incentive packages to align the interests of management with those of the stockholders. 72. Individual and institutional shareholders have the same rights that include all except one of the following. Which one is not a shareholder right? A. the right to sell stock B. the right to vote the proxy C. the right to bring suit for damages, if the economy declines D. certain residual rights following the liquidation of the company, once creditors and claimants are paid Answer: C. the right to bring suit for damages, if the economy declines Rationale: Even an individual shareholder has several rights, including (1) the right to sell the stock, (2) the right to vote the proxy (which includes the election of board members), (3) the right to bring suit for damages if the directors or managers of the corporation fail to meet their obligations, (4) the right to certain information from the company, and (5) certain residual rights following the liquidation of the company (or its filing for reorganization under bankruptcy laws), once creditors and other claimants are paid off. 73. Shareholders rely on CEOs to adopt policies and strategies that maximize the value of their shares. To motivate CEOs to maximize the value of their companies, boards of directors can consider all of the following options except one. Which one is it? A. Boards can require that the CEOs become substantial owners of company stock. B. Salaries, bonuses, and stock options can be structures to provide rewards for superior performance. C. Salaries can be structured to provide penalties for poor performance. D. Dismissal for poor performance is not an option. Answer: D. Dismissal for poor performance is not an option. Rationale: Shareholders rely on CEOs to adopt policies and strategies that maximize the value of their shares. A combination of three basic policies may create the right monetary incentives for CEOs to maximize the value of their companies: Boards can require that the CEOs become substantial owners of company stock; salaries, bonuses, and stock options can be structured so as to provide rewards for superior performance and penalties for poor performance; dismissal for poor performance should be a realistic threat. 74. Boards of directors have responded to financial crises, corporate scandals, regulator obligations, and investor requests for structural changes. In looking at the 2011 Harvard Business Review study of the changes in configuration of boards since 1987, which change has been brought about by government legislation? A. Percentage of boards that have an average age of 64 or older has increased. B. Average pay for directors has increased. C. Percentage of boards with 12 or fewer members has increased. D. Percentage of the directors that are independent has increased. Answer: D. Percentage of the directors that are independent has increased. Rationale: The Sarbanes-Oxley Act and pressure from investors have led to an increase in the number of independent directors. In fact, over half the S&P 500 firms now have no insiders other than the CEO on the board. 75. CEO duality refers to a situation in which the _____________. A. CEO formulates and implements strategies B. CEO serves as both the CEO and the chair of the board of directors C. CEO is responsible for acting as CEO and serving on the compensation committee D. CEO is responsible for acting as CEO and Chief Operating Officer (COO) Answer: B. CEO serves as both the CEO and the chair of the board of directors Rationale: CEO duality is one of the most controversial issues in corporate governance. It refers to the dual leadership structure where the CEO acts simultaneously as the chair of the board of directors. 76. In choosing sides concerning CEO duality, two schools of thought exist. Which of the following would not be a consideration for the Unity of Command school of thought? A. One person holding both roles will be able to act more efficiently and effectively. B. CEO duality provides smoother strategic decision making. C. CEO duality creates unit across the board of directors and managers of a company. D. CEO duality slows down decision-making. Answer: D. CEO duality slows down decision-making. Rationale: CEO duality is one of the most controversial issues in corporate governance. It refers to the dual leadership structure where the CEO acts simultaneously as the chair of the board of directors. Advocates of the unity of command perspective believe when one person holds both roles, he or she is able to act more efficiently and effectively. CEO duality provides firms with a clear focus on both objectives and operations as well as eliminates confusion and conflict between the CEO and the chairman. Thus, it enables smoother, more effective strategic decision making. 77. In choosing sides concerning CEO duality, two schools of thought exist. Which of the following would not be a consideration for the Agency Theory school of thought? A. CEO duality complicates the issue of CEO succession. B. CEO duality reinforces popular doubts about the legitimacy of the system as a whole. C. CEO duality can create conflicts of interest that can negatively affect the interests of the shareholders. D. Firm performance always is improved under CEO duality. Answer: D. Firm performance always is improved under CEO duality. Rationale: CEO duality is one of the most controversial issues in corporate governance. It refers to the dual leadership structure where the CEO acts simultaneously as the chair of the board of directors. Supporters of agency theory argue that the positions of CEO and chairman should be separate. The case for separation is based on the simple principle of the separation of power. Duality also complicates the issue of CEO succession. Duality also serves to reinforce popular doubts about the legitimacy of the system as a whole and evokes images of bosses writing their own performance reviews and setting their own salaries. When the positions are broken apart, there is a clear shift in the performance of the firm. If the firm has been performing well, its performance declines after the separation. If the firm has been doing poorly, it experiences improvement after separating the two roles. 78. External governance control mechanisms include all of the following except _____________. A. auditors B. analysts C. competitors D. media Answer: C. competitors Rationale: External governance control mechanisms include the market for corporate control, auditors, governmental regulatory bodies, banks and analysts, media, and public activists. 79. In trying to assure that managerial actions lead to shareholder value maximization, a risk can come about if the market value of a firm becomes less than its book value. The risk is _____________. A. it becomes an attractive takeover target B. the firm will be delisted by the stock exchange C. the Securities and Exchange Commission will not allow it to declare dividends until the market value once again exceeds the book value D. the firm will be unable to service its debt Answer: A. it becomes an attractive takeover target Rationale: If the market value of the firm becomes less than the book value, a corporate raider can take over the company for a price less than the book value of the assets of the company, and would be likely to fire underperforming management. 80. The takeover constraint refers to _____________. A. constraints placed by the firm on raiders who want to take over the firm B. legal constraints that limit the ability of the raiders to acquire a firm C. provisions in the charter of a company that prevents it from attempting a takeover of other companies D. the risk of being acquired by a hostile raider Answer: D. the risk of being acquired by a hostile raider Rationale: The risk of being acquired by a hostile raider is often referred to as the takeover constraint. 81. It is generally argued that the takeover constraint deters management from _____________. A. engaging in opportunistic behavior B. considering acquiring other companies C. declaring dividends D. increasing the level of borrowing of a firm Answer: A. engaging in opportunistic behavior Rationale: The risk of being acquired by a hostile raider is often referred to as the takeover constraint. The takeover constraint deters management from engaging in opportunistic behavior. 82. The failure of many auditing firms to raise red flags about accounting irregularities in companies such as Enron and WorldCom is generally attributed to all of the following factors except _____________. A. the desire to get future auditing contracts from the company B. the desire to get consulting work from the company because most audit firms also do consulting work C. the fact that auditors are appointed by the firm D. the failure of U.S. audit firms to hire technically qualified professionals Answer: D. the failure of U.S. audit firms to hire technically qualified professionals Rationale: The failure of auditing leading to the bankruptcy of Enron and WorldCom likely had several causes. First, auditors are appointed by the firm being audited. The desire to continue that business relationship sometimes makes them overlook financial irregularities. Second, most auditing firms also do lucrative consulting work with the firms that they audit. Understandably, some of them tend not to ask too many difficult questions, because they fear jeopardizing the consulting business. 83. The reasons analyst recommendations are often more optimistic than warranted by an objective analysis of the facts include all of the following except that _____________. A. many analysts fail to grasp the gravity of the problems facing a company B. sell recommendations generate lower commissions than buy recommendations C. the firms for which analysts work may have lucrative investment banking relationships with the firm D. analysts are often pressured by their superiors to overlook negative information Answer: B. sell recommendations generate lower commissions than buy recommendations Rationale: Analyst recommendations are often more optimistic than warranted by facts. Many analysts failed to grasp the gravity of the problems surrounding Lehman Brothers and Countrywide until the very end. Most analysts work for firms that have investment banking relationships with the companies they follow. Otherwise competent analysts may be pressured to overlook negative information or tone down their criticism. 84. All of the following are types of information that a firm is required to disclose except _____________. A. quarterly and annual filings of financial information B. stock trading by insiders C. details of new products under development D. details of executive compensation packages Answer: C. details of new products under development Rationale: All public corporations are required to disclose a substantial amount of financial information by bodies such as the Securities and Exchange Commission. These include quarterly and annual filings of financial performance, stock trading by insiders, and details of executive compensation packages. 85. In emerging economies and continental Europe, firms often can be characterized by all of the following except _____________. A. concentrated ownership B. low family ownership and control C. business group structures D. weak legal protection for minority shareholders Answer: B. low family ownership and control Rationale: In emerging economies and continental Europe there is often concentrated ownership, along with extensive family ownership and control, business group structures, and weak legal protection for minority shareholders. 86. In principal-principal conflicts (conflicts between controlling shareholders and minority shareholders), the ownership (of equity) is _____________. A. widely dispersed B. controlled almost completely by management C. concentrated D. often held by employee stock ownership programs Answer: C. concentrated Rationale: The ownership pattern typical of principal-principal conflicts is concentrated; often greater than 50 percent of equity is controlled by controlling shareholders. 87. Conditions that must be met for principal-principal (PP) conflicts to occur include all of the following except _____________. A. a dominant owner or group of owners who have interests that are distinct from minority shareholders B. legislation that protects the interests of minority shareholders C. a motivation for the controlling shareholders to exercise their dominant position to their advantage D. few formal (such as legislation or regulatory bodies) or informal constraints that discourage or prevent the controlling shareholders from exploiting their advantageous positions Answer: B. legislation that protects the interests of minority shareholders Rationale: In general, three conditions must be met for PP conflicts to occur: a dominant owner or group of owners who have distinct interests from minority shareholders; motivation for the controlling shareholders to exercise their dominant positions to their advantage; and few formal (such as legislation or regulatory bodies) or informal constraints to discourage controlling shareholders from exploiting their advantageous positions. 88. Expropriation of minority shareholders means that minority shareholders _____________. A. must sell their shares upon demand B. cannot own shares in foreign firms C. do not receive dividends D. are adversely affected by the actions of controlling shareholders Answer: D. are adversely affected by the actions of controlling shareholders Rationale: Expropriation of minority shareholders is defined as activities that enrich the controlling shareholders at the expense of minority shareholders. Essay Questions 89. What value do effective strategic control systems provide to the implementation of strategy? Answer: Effective strategic control systems enhance strategy implementation by monitoring progress, identifying deviations, and facilitating timely corrective actions. They ensure alignment between strategic goals and operational activities, promoting accountability and performance improvement throughout the organization. 90. What are the advantages and disadvantages associated with using traditional approaches to strategic control? Answer: Traditional approaches to strategic control offer advantages such as simplicity, clarity in goal setting, and established performance metrics. However, they may lack flexibility to adapt to rapid changes, overlook qualitative aspects of performance, and promote rigidity in decision-making processes. 91. What are the advantages and disadvantages associated with using contemporary approaches to strategic control? Answer: Contemporary approaches to strategic control provide advantages like real-time data analytics, dynamic performance measurement, and adaptive strategy execution. They support agile decision-making, responsiveness to market shifts, and integration of qualitative and quantitative insights. However, they require significant technological investment, expertise in data management, and organizational readiness for change. 92. What are the four characteristics of effective contemporary control systems? Give examples of how firms apply these practices. Answer: Characteristics of effective contemporary control systems include real-time data analytics (e.g., using AI and machine learning for predictive analysis), dynamic goal adjustment (e.g., agile methodologies for iterative strategy execution), employee empowerment (e.g., decentralized decision-making), and strategic agility (e.g., adaptive strategies in response to market changes). Examples include Amazon's use of real-time customer data for personalized recommendations and Tesla's agile production methods to meet shifting market demands. 93. Why is it important to have a balance among the three behavioral controls (culture, rewards, and boundaries)? Is there a danger associated with emphasizing one behavioral approach more than another? Answer: Balancing behavioral controls (culture, rewards, boundaries) ensures alignment between organizational values, incentives for desired behaviors, and guidelines for acceptable conduct. Emphasizing one control over others may lead to cultural dissonance, demotivation if rewards are misaligned, or ethical lapses if boundaries are unclear. Achieving balance fosters a cohesive and ethical work environment conducive to sustained performance and organizational success. 94. Discuss the benefits and risks of using reward and incentive systems as a means of strategic control. Answer: Reward and incentive systems as strategic controls offer benefits like motivating performance, aligning behaviors with organizational goals, and attracting and retaining talent. However, risks include incentivizing short-term gains over long-term sustainability, fostering competition at the expense of collaboration, and creating unintended consequences if metrics are misaligned with strategic objectives. 95. What are the characteristics of short-term objectives? Provide examples of practical applications of these characteristics by organizations. Answer: Characteristics of short-term objectives include specificity (clear and measurable goals), attainability (realistic targets within a defined timeframe), and relevance (alignment with broader strategic goals). Organizations like Google set short-term objectives for product launches and marketing campaigns, ensuring timely execution and performance evaluation. 96. What are the three key means to align the interests of owners (shareholders) and managers in a corporation? Answer: Key means to align interests of shareholders and managers include executive compensation tied to performance metrics (e.g., stock options), independent board oversight to monitor management decisions, and shareholder activism advocating for governance reforms and transparency. 97. Is CEO duality good or bad? Summarize the two schools of thought that represent alternate positions on this issue. Answer: CEO duality, where the CEO also serves as the board chair, has proponents arguing it streamlines decision-making and enhances leadership coherence. Critics believe separating roles ensures checks and balances, promotes board independence, and mitigates conflicts of interest between management and oversight functions. Balancing centralized leadership versus governance independence remains a key debate in corporate governance. 98. What is meant by the term market for corporate control? How does the market for corporate control act as an external control mechanism? Answer: The market for corporate control refers to the environment where corporate control rights (e.g., ownership, management) are transferred through mergers, acquisitions, or hostile takeovers. It acts as an external control mechanism by disciplining underperforming managers or ineffective governance through market pressures for efficiency, accountability, and shareholder value maximization. 99. Identify at least three external control mechanisms. Discuss the role played by each of these. Answer: External control mechanisms include: • Regulation: Government oversight and compliance requirements ensure adherence to legal standards and protect shareholder interests. • Market competition: Rival firms' actions and market dynamics incentivize firms to innovate, improve efficiency, and deliver value to stakeholders. • Auditing and financial reporting: Independent audits and transparent financial reporting enhance accountability, ensuring accurate representation of company performance and financial health. 100. What is meant by principal-principal (PP) conflict? What are the implications for sound corporate governance? Answer: Principal-principal (PP) conflict occurs when different groups of shareholders (e.g., institutional investors vs. retail investors) have divergent interests regarding corporate strategy, executive compensation, or governance practices. Resolving PP conflicts requires transparency, equitable treatment of shareholders, and board governance that balances diverse stakeholder interests to foster long-term sustainability and shareholder value. Chapter 10 Creating Effective Organizational Designs True/False Questions 1. The strategy and structure of a firm change as the firm increases in size, diversifies into new product markets, and limits its geographic scope. Answer: False Rationale: The strategy and structure of a firm change as it increases in size, diversifies into new product markets, and expands its geographic scope. 2. A strategy of related diversification requires a need to reorganize around product lines and geographic markets. This leads to a divisional structure. Answer: False Rationale: A strategy of related diversification requires a need to reorganize around product lines or geographic markets. This leads to a divisional structure. 3. When a firm has international operations, choosing the most appropriate structure depends upon the extent of international expansion, the type of strategy, and the degree of market diversity. Answer: False Rationale: Deciding upon the most appropriate structure when a firm has international operations depends on three primary factors: the extent of international expansion, type of strategy (global, multidomestic, or transnational), and the degree of product diversity. 4. In a simple structure where the owner manager makes most of the important decisions, extensive rules and regulations are used to maintain order. Answer: False Rationale: A simple structure may foster creativity and individualism since there are generally few rules and regulations. 5. A small firm with a simple structure often fosters creativity and individualism because of its informal atmosphere. Answer: True Rationale: The simple structure is highly informal and the coordination of tasks is accomplished by direct supervision. A simple structure may foster creativity and individualism since there are generally few rules and regulations. 6. A simple organizational structure may lead to problems such as unclear boundaries of authority and few career advancement options. Answer: True Rationale: In a simple structure, employees may not clearly understand their responsibilities, which can lead to conflict and confusion. Small organizations have flat structures that limit opportunities for upward mobility. 7. As firms grow, owner managers often need to hire functional specialists to handle the increased information-processing burden. Answer: True Rationale: As firms grow, excessive demands may be placed on the owner-manager in order to obtain and process all of the information necessary to run the business. Chances are the owner will not be skilled in all specialties (e.g., accounting, engineering, production, and marketing). Thus, he or she will need to hire specialists in the various functional areas. 8. To enhance integration and control of related product market activities, the functional structure minimizes centralization. Answer: False Rationale: By bringing together specialists into functional departments, a firm is able to enhance its coordination and control within each of the functional areas. Decision making in the firm will be centralized at the top of the organization. 9. One disadvantage of a functional structure is that differences in functional orientation may impede organization coordination and communication. Answer: True Rationale: The differences in values and orientations among functional areas may impede communication and coordination. Edgar Schein argued that shared assumptions form around functional units in an organization. This leads to stove pipes or silos, in which departments view themselves as isolated, self-contained units with little need for interaction and coordination with other departments. 10. Operational decision making in a large business places excessive demands on top management of the firm. Answer: True Rationale: Operational decision making in a large business with a divisional structure places excessive demands on top management of the firm. In order to attend to broader, longer-term organizational issues, top-level managers must delegate decision making to lower-level managers. 11. A major disadvantage of adopting a divisional structure is the tendency for managers to focus on short-term objectives. Answer: True Rationale: Since each division is evaluated in terms of financial measures such as return on investment and revenue growth, there is often an urge to focus on short-term performance. If corporate management uses quarterly profits as the key performance indicator, divisional management may emphasize making the numbers and minimize activities, such as advertising, maintenance, and capital investments, which would detract from short-term performance measures. 12. A major disadvantage of a divisional structure is that when divisions are separated to manage individual product markets, there is a separation of strategic and operational control. Answer: False Rationale: By creating separate divisions to manage individual product markets, there is a separation of strategic and operating control. This is an advantage because divisional managers can focus their efforts on improving operations in the product markets for which they are responsible, and corporate officers can devote their time to overall strategic issues for the entire corporation. 13. The strategic business unit (SBU) and holding company structure are variants of the functional form of structure. Answer: False Rationale: One variation of the divisional form is the strategic business unit (SBU) structure. With a SBU structure, divisions with similar products, markets, and/or technologies are grouped into homogeneous units to achieve some synergies. 14. One major advantage of the holding company form of organization structure is that it minimizes the duplication of functional activities between product lines. Answer: False Rationale: The holding company structure is a variation of the divisional structure. Whereas the SBU structure is often used when similarities exist between the individual businesses (or divisions), the holding company structure is appropriate when the businesses in a corporation portfolio do not have much in common. The lack of synergy means that this duplication at the functional level exits. 15. The matrix structure attempts to combine the advantages of the functional and product-oriented structure. Answer: True Rationale: One approach that tries to overcome the inadequacies inherent in the other structures is the matrix organizational structure. It is a combination of the functional and divisional structures. Most commonly, functional departments are combined with product groups on a project basis. 16. A matrix organization is organized strictly along product lines. Answer: False Rationale: The matrix organizational structure is a combination of the functional and divisional structures. Most commonly, functional departments are combined with product groups on a project basis. 17. A major disadvantage of the matrix structure is that it duplicates the use of specialized personnel, equipment, and facilities. Answer: False Rationale: The matrix structure facilitates the use of specialized personnel, equipment, and facilities. Instead of duplicating functions, as would be the case in a divisional structure based on products, the resources are shared. 18. A worldwide product division structure is used when global strategies require that each division be responsible for overall efficiency and performance. Answer: True Rationale: Global strategies are driven by economic pressures that require managers to view operations in different geographic areas to be managed for overall efficiency. One structure consistent with the efficiency perspective is the worldwide product division structure. 19. A global startup typically benefits from lower communication, coordination, and transportation costs. Answer: False Rationale: There is no reason for every start-up to be global. Being global necessarily involves higher communication, coordination, and transportation costs. 20. Global start-ups occur after a corporation has exhausted all other possibilities for domestic growth. Answer: False Rationale: International expansion occurs rather late for most corporations, typically after possibilities of domestic growth are exhausted. Increasingly, we are seeing two interrelated phenomena. First, many firms now expand internationally relatively early in their history. Second, some firms are born global from the very beginning and many start-ups are global in their activities. A global start-up has been defined as a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. Right from the beginning, it uses in-puts from around the world and sells its products and services to customers around the world. 21. The structure of a firm typically has almost no effect on its strategy. Answer: False Rationale: The structure of an organization can also have an important influence on how it competes in the marketplace. It can also strongly influence the strategy, day-to-day operations, and performance of a firm. 22. According to the text, boundaryless organizational structures are most effective when they replace rather than complement traditional organizational structures. Answer: False Rationale: Boundaryless organizational designs need not replace the traditional forms of organizational structure, but they should complement them. 23. Jack Welch, former CEO of GE, believes that all internal and external organizational boundaries should vanish completely. Answer: False Rationale: Jack Welch, former CEO of GE, has suggested that boundaryless does not imply that all internal and external boundaries vanish completely, but that they become more open and permeable. 24. Different types of boundaries place limits on organizations in order to foster high degrees of interaction with inside influences and varying levels of permeability. Answer: False Rationale: There are primarily four types of boundaries that place limits on organizations. In the current dynamic business environment, different types of boundaries are needed to foster high degrees of interaction with outside influences and varying levels of permeability. 25. In a barrier-free organization, differences in skills, authority, and talent disappear. Answer: False Rationale: Just because work roles are no longer clearly defined, however, does not mean that differences in skills, authority, and talent disappear. A barrier-free organization enables a firm to bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior. Eliminating the multiple boundaries that stifle productivity and innovation can enhance the potential of the entire organization. 26. An advantage of the barrier-free form of organizing is that internal cooperation and shared objectives are not required for it to work. Answer: False Rationale: For barrier-free organizations to work effectively, the level of trust and shared interests among all parts of the organization must be raised. Barrier-free organizations also require a shift in the organization philosophy from executive to organizational development and from investments in high-potential individuals to investments in leveraging the talents of all individuals. 27. According to author Jeffrey Pfeffer, the advantages of teams are that employees control themselves, develop more creative solutions to problems, and permit the absorption of administrative tasks previously performed by specialists. Answer: True Rationale: Jeffrey Pfeffer, suggests that teams have three primary advantages. First, teams substitute peer-based control for hierarchical control of work activities. Second, teams frequently develop more creative solutions to problems because they encourage the sharing of the tacit knowledge held by individuals. Third, by substituting peer control for hierarchical control, teams permit the removal of layers of hierarchy and absorption of administrative tasks previously performed by specialists. 28. According to the text, the factor that most distinguishes a superior team from a good team is talent. Answer: False Rationale: Vision, talent, and motivation can carry a team only so far. Research has shown that super teams have higher levels of authenticity and caring, which allowed the full synergy of their individual talents, motivation, and vision. 29. A barrier-free organization creates successful relationships between internal and external constituencies and sometimes with competitors as well. Answer: True Rationale: Barrier-free organizations create successful relationships between both internal and external constituencies. There is one additional constituency, competitors, with whom some organizations have benefited as they developed cooperative relationships. For example, after struggling on their own to develop the technology, Ford, Renault-Nissan, and Daimler have agreed to cooperate with each other to develop zero emission, hydrogen fuel cell systems to power automobiles. 30. Managers trained in rigid hierarchies do not find it difficult to transition to participative style required for effective teamwork. Answer: False Rationale: Often, managers trained in rigid hierarchies find it difficult to make the transition to the more democratic, participative style that teamwork requires. 31. Outsourcing in noncore functions of modular companies offers the advantage of decreased overall costs, but the company will be unable to focus on scarce resources in the areas where it holds competitive advantage. Answer: False Rationale: In a modular company, outsourcing the noncore functions offers three advantages: A firm can decrease overall costs, stimulate new product development by hiring suppliers with superior talent to that of in-house personnel, avoid idle capacity, reduce inventories, and avoid being locked into a particular technology; It can focus scarce resources on the areas where it holds a competitive advantage. These benefits can translate into more funding for R and D hiring the best engineers, and providing continuous training for sales and service staff; it can tap into the knowledge and expertise of its specialized supply chain partners, adding critical skills and accelerating organizational learning. 32. Because the modular form of organizing involves outsourcing vital functions, modular firms often forfeit full strategic control. Answer: False Rationale: The modular organization outsources nonvital functions, tapping into the knowledge and expertise of best in class suppliers, but retains strategic control. Outsiders may be used to manufacture parts, handle logistics, or perform accounting activities. 33. Modular companies can achieve rapid growth because they do not require large investments in fixed assets. Answer: True Rationale: The modular type enables a company to leverage relatively small amounts of capital and a small management team to achieve seemingly unattainable strategic objectives. 34. Outsourcing relieves companies of the requirement to maintain skill levels needed to manufacture essential components. Answer: True Rationale: Too much outsourcing can result in a firm giving away too much skill and control. Outsourcing relieves companies of the requirement to maintain skill levels needed to manufacture essential components. They become more dependent upon their suppliers. 35. One of the risks of outsourcing is a loss of cross-functional skills. Answer: True Rationale: Cross-functional skills are acquired through the interaction of individuals in various departments within a company, which assists a department in solving problems. However, if a firm outsources key functional responsibilities, such as manufacturing, communication across departments can become more difficult. A firm and its employees must now integrate their activities with a new, outside supplier. 36. The virtual type of organization is a network of independent companies linked together to share skills, costs, and access to the markets of each other. Answer: True Rationale: The virtual organization can be viewed as a continually evolving network of independent companies (suppliers, customers, even competitors) linked together to share skills, costs, and access to the markets of each other. 37. The virtual organization is characterized by participating firms which pursue a collective strategy that enables them to cope with environmental uncertainty through cooperative efforts. Answer: True Rationale: The virtual organization is characterized by participating firms that give up part of their control and accept interdependent destinies. Participating firms pursue a collective strategy that enables them to cope with uncertainty through cooperative efforts. 38. Managing virtual structures requires new and difficult-to-acquire managerial skills. Answer: True Rationale: One of the negatives associated with the virtual organization is that it requires new and difficult-to-acquire managerial skills. 39. Horizontal organization structures facilitate resource sharing and help to create a sense of common purpose. Answer: True Rationale: Horizontal organizational structures, which group similar or related business units under common management control, facilitate sharing resources and infrastructures to exploit synergies among operating units and help to create a sense of common purpose. 40. One of the advantages of boundaryless structures is that they can be implemented without upgrading the skills of workers and managers. Answer: False Rationale: As boundaryless structures are implemented, processes are reengineered, and organizations become increasingly dependent on sophisticated ITs, the skills of workers and managers alike must be upgraded to realize the full benefits. 41. Procter and Gamble used communities of practice and human resource practices to help it achieve effective collaboration and integration across its different business units. This effort resulted in the successful development of the Crest White strips product and is an example of good use of boundary-constrained organizational design. Answer: False Rationale: This is a good example of boundaryless organizational design in which effective collaboration and integration across the different business units of P and G resulted in the successful introduction of Crest White strips. 42. Ambidextrous organizational designs are useful for firms that wish to create modest, incremental innovations at the same time as dramatic, breakthrough innovation. This is done by maintaining adaptability and alignment of values and coordination across organizational activities. Answer: True Rationale: Firms that achieve both adaptability and alignment are considered ambidextrous organizations, aligned and efficient in how they manage the business of today, but flexible enough to changes in the environment so that they will prosper tomorrow. Multiple Choice Questions 43. In large organizations, a strategy of diversification requires a need to reorganize around ______________ or _____________. A. product lines; geographic markets B. product lines; competition C. competitor lines; geographic markets D. distribution lines; competitor markets Answer: A. product lines; geographic markets Rationale: A strategy of related diversification requires a need to reorganize around product lines or geographic markets. This leads to a divisional structure. 44. Which of the following is not a primary factor that a large firm with international operations should consider when choosing the appropriate structure for its organization? A. the extent of international expansion B. the type of strategy (global, multidomestic, or transnational) C. the degree of product diversity D. the degree of market diversity Answer: D. the degree of market diversity Rationale: Deciding upon the most appropriate structure when a firm has international operations depends on three primary factors: the extent of international expansion, the type of strategy (global, multidomestic, or transnational), and the degree of product diversity. 45. When an organization with a simple structure increases its sales revenue and volume of outputs, it is most likely to develop a ______________ structure. A. divisional B. functional C. product-market D. geographic Answer: B. functional Rationale: A new firm with a simple structure typically increases its sales revenue and volume of outputs over time. It may also engage in some vertical integration to secure sources of supply (backward integration) as well as channels of distribution (forward integration). The simple-structure firm then implements a functional structure to concentrate efforts on both increasing efficiency and enhancing its operations and products. 46. When an organization with a functional structure diversifies into related product-markets, it generally _____________. A. maintains its functional structure B. develops a divisional structure C. develops a matrix structure D. develops a worldwide product-division structure Answer: B. develops a divisional structure Rationale: A firm with a functional structure may see its initial markets mature, so it looks beyond its present products and markets for possible expansion. A strategy of related diversification requires a need to reorganize around product lines or geographic markets. This leads to a divisional structure. 47. A strategy of related diversification requires most firms to organize around geographical areas or product lines. This type of organizational growth leads to ______________ structure. A. a divisional B. a functional C. a matrix D. an international Answer: A. a divisional Rationale: A strategy of related diversification requires a need to reorganize around product lines or geographic markets. This leads to a divisional structure. 48. Which of the following statements about simple organizational structures is not true? A. Small firms with a narrow product-market scope will adopt such a structure. B. Decision making authority is highly centralized. C. There is little specialization of tasks. D. Creativity and individualism are rare. Answer: D. Creativity and individualism are rare. Rationale: The simple organizational structure is the oldest, and most common, organizational form. Most organizations are very small and have a single or very narrow product line in which the owner-manager (or top executive) makes most of the decisions. Decision making is highly centralized. There is little specialization of tasks. There are few rules and regulations. There exists an informal evaluation and reward system. A simple structure may foster creativity and individualism, since there are generally few rules and regulations. 49. A simple structure is characterized by _____________. A. high specialization and low centralization B. low specialization and high centralization C. low formality and low creativity D. high formality and low centralization Answer: B. low specialization and high centralization Rationale: The simple organizational structure is the oldest, and most common, organizational form. Most organizations are very small and have a single or very narrow product line in which the owner-manager makes most of the decisions. Decision making is highly centralized and there is little specialization of tasks. 50. Functional structures are usually found in organizations where _____________. A. there is high volume production B. there are unrelated product lines or service offerings C. there is very little vertical integration D. there exists a strong need to decentralize decision making Answer: A. there is high volume production Rationale: Functional structures are generally found in organizations in which there is a single or closely related product or service, high production volume, and some vertical integration. 51. Which of the following is an advantage of a functional type of organizational structure? A. Decentralized decision-making enhances an organization-wide perspective across functions. B. It facilitates the development of general management talent. C. Pooling of specialists enhances coordination and control. D. It is easy to establish uniform performance standards. Answer: C. Pooling of specialists enhances coordination and control. Rationale: By bringing together specialists into functional departments, a firm is able to enhance its coordination and control within each of the functional areas. 52. Which of the following is a disadvantage of a functional type of organizational structure? A. Differences in functional orientation may impede communication and coordination. B. Use of managerial and technical talent is inefficient due to pooling of expertise in functional areas. C. Decision making is centralized at the top of the organization. D. Managers tend to be overly concerned with long-term strategies that minimize the importance of functional area strengths. Answer: A. Differences in functional orientation may impede communication and coordination. Rationale: The differences in values and orientations among functional areas may impede communication and coordination. Departments may come to view themselves as isolated, self-contained units with little need for interaction and coordination with other departments. 53. Which of the following is an advantage of a divisional type of organizational structure? A. efficient use of managerial and technical talent B. an enhanced ability to respond quickly to changes in the external environment C. high degree of emphasis on long-term performance D. uniformity in image and quality across divisions Answer: B. an enhanced ability to respond quickly to changes in the external environment Rationale: The focus on products and markets by the divisional executives provides the corporation with an enhanced ability to respond quickly to important changes. Since there are functional departments within each division of the corporation, the problems associated with sharing resources across functional departments are minimized. 54. Which of the following is not a disadvantage of a divisional type of organizational structure? A. It can be very expensive compared to a functional organizational structure. B. There is a strong tendency for divisions to focus on short-term performance. C. There can be dysfunctional competition among divisions. D. There is separation of strategic and operating control. Answer: D. There is separation of strategic and operating control. Rationale: A divisional structure can be very expensive; there can be increased costs due to the duplication of personnel, operations, and investment since each division must staff multiple functional departments. There also can be dysfunctional competition among divisions since each division tends to become concerned solely about its own operations. Since each division is evaluated in terms of financial measures such as return on investment and revenue growth, there is often an urge to focus on short-term performance. 55. An organization such as ConAgra that has dozens of different divisions with similar products will probably have the greatest success with which form of organization structure? A. functional structure B. matrix structure C. strategic business unit structure D. holding company structure Answer: C. strategic business unit structure Rationale: Highly diversified corporations such as ConAgra, a 13 billion dollar food producer, may consist of dozens of different divisions. If ConAgra were to use a purely divisional structure, it would be nearly impossible for the corporate office to plan and coordinate activities, because the span of control would be too large. To attain synergies, ConAgra has put its diverse businesses into three primary SBUs: food service (restaurants), retail (grocery stores), and agricultural products. 56. Which of the following is not an advantage of a strategic business unit (SBU) type of organizational structure? A. Divisions with similar products, markets, or technologies are formed into homogeneous groups that can achieve synergies. B. Divisional executives can respond quickly to market changes and opportunities. C. Planning and control by the corporate office is more manageable. D. The corporate office is more removed from the individual divisions. Answer: D. The corporate office is more removed from the individual divisions. Rationale: With an SBU structure, divisions with similar products, markets, and/or technologies are grouped into homogeneous units to achieve synergies. It makes planning and control by the corporate office more manageable. With greater decentralization of authority, individual businesses can react more quickly to important changes in the environment than if all divisions had to report directly to the corporate office. 57. Important advantages of a holding company structure include _____________. A. savings in personnel and overhead expenses associated with a small corporate office B. a high level of awareness at the corporate office of issues facing individual divisions C. a high level of control of division executives by executives at the corporate level D. gaining synergistic benefits across businesses Answer: A. savings in personnel and overhead expenses associated with a small corporate office Rationale: The holding company structure has the cost savings associated with fewer personnel and the lower overhead resulting from a small corporate office and fewer hierarchical levels. 58. Strategic business unit (SBU) and holding company structures result from extensive _____________. A. diversification B. vertical integration C. international expansion D. organizational flattening Answer: A. diversification Rationale: Both result from diversification; an SBU structure is most likely when there is related diversification while holding company structures are most appropriate for firms with a strategy of unrelated diversification. 59. Strategic business unit (SBU) structures are best suited for corporations pursuing _____________, whereas holding company structures are best suited for companies with ______________ strategies. A. product-market diversification; international B. international diversification; product-market C. related diversification; unrelated diversification D. unrelated diversification; related diversification Answer: C. related diversification; unrelated diversification Rationale: A SBU structure is most likely when there is related diversification while holding company structures are most appropriate for firms with a strategy of unrelated diversification. 60. A matrix organizational structure is characterized by a combination of the ______________ and _____________. A. functional structure; divisional structure B. simple structure; functional structure C. simple structure; divisional structure D. holding company structure; divisional structure Answer: A. functional structure; divisional structure Rationale: The matrix organizational structure is a combination of the functional and divisional structures. The individuals who work in a matrix organization become responsible to two managers: the project manager and the manager of their functional area. The matrix structure facilitates the shared use of specialized personnel, equipment, and facilities. 61. Complicated working relationships, intense power struggles, and excessive reliance on group processes are disadvantages of which type of organizational structure? A. divisional B. matrix C. holding company D. functional Answer: B. matrix Rationale: The dual-reporting structures in the matrix organizational structure can result in uncertainty and lead to intense power struggles and conflict over the allocation of personnel and other resources. Working relationships become more complicated. This may result in excessive reliance on group processes and teamwork, along with a diffusion of responsibility, which in turn may erode timely decision making. 62. Which of the following is considered to be an advantage of a matrix structure? A. the layering of matrices B. increased clarity in reporting relationships C. increased responsiveness to the market D. fewer power struggles and reduced conflict Answer: C. increased responsiveness to the market Rationale: Resource sharing and collaboration in the matrix organizational structure enable a firm to use resources more efficiently and to respond more quickly and effectively to changes in the competitive environment. 63. Generally speaking, discussions of the relationship between strategy and structure strongly imply that _____________. A. strategy follows structure B. structure follows strategy C. strategy can effectively be formulated without considering structural elements D. structure typically has a very small influence on the strategy of a firm Answer: B. structure follows strategy Rationale: Often the relationship between strategy and structure strongly implies that structure follows strategy. The strategy that a firm chooses (e.g., related diversification) dictates such structural elements as the division of tasks, the need for integration of activities, and authority relationships within the organization. 64. If an international firm has a multidomestic strategy and a relatively high level of product diversity, the best choice for its organizational structure is ______________ structure. A. a worldwide functional B. a worldwide product division C. a worldwide matrix D. an international division Answer: C. a worldwide matrix Rationale: Multidomestic strategies are driven by political and cultural imperatives requiring managers within each country to respond to local conditions. As products of the firm and/or market diversity become large, it is likely to benefit from a worldwide matrix structure. 65. If an international firm has a global strategy and a relatively low level of product diversity, the best choice for its organizational structure is ______________ structure. A. a worldwide functional B. a worldwide product division C. a worldwide matrix D. an international division Answer: B. a worldwide product division Rationale: Global strategies are driven by economic pressures that require managers to view operations in different geographic areas to be managed for overall efficiency. One structure consistent with the efficiency perspective is the worldwide product division structure, which is most appropriate for relatively low levels of product diversity. 66. The relationship between strategy and structure can be best described as _____________. A. strategy determines structure but structure does not determine strategy B. structure determines strategy but strategy does not determine structure C. strategy and structure influence each other D. a third force determines both strategy and structure Answer: C. strategy and structure influence each other Rationale: Discussions of the relationship between strategy and structure usually strongly imply that structure follows strategy. The strategy that a firm chooses dictates structural elements like the division of tasks, the need for integration of activities, and authority relationships. However, an existing structure can influence strategy formulation. Once the structure of the firm is in place, it is very difficult and expensive to change. 67. A global start-up faces many management challenges including _____________. A. communication and coordination across time zones B. pressure to perform internally all primary activities of the value chain C. assuring financing from home country only D. hiring only from home country Answer: A. communication and coordination across time zones Rationale: Successful management of a global start-up presents many challenges. Communication and coordination across time zones and cultures are always problematic. Since most global start-ups have far less resources than well-established corporations, one key for success is to internalize few activities and outsource the rest. Managers of such firms must have considerable prior international experience so that they can successfully handle the inevitable communication problems and cultural conflicts. Another key for success is to keep the communication and coordination costs low. The only way to achieve this is by creating less costly administrative mechanisms. 68. Which of the following is not a boundaryless organizational design? A. virtual B. modular C. matrix D. barrier-free Answer: C. matrix Rationale: There are three approaches to creating boundaryless organizations. The barrier-free type involves making all organizational boundaries, internal and external, more permeable. The modular and virtual types of organizations focus on the need to create seamless relationships with external organizations such as customers or suppliers. 69. According to author, Jeffrey Pfeffer, which of the following is not an advantage of teams? A. Teams interact so closely and therefore coordination and integration becomes unnecessary. B. Teams substitute peer-based control for hierarchical control of work. C. Teams often develop more creative solutions, because they share. D. Teams permit the absorption of administrative tasks previously performed by specialists. Answer: A. Teams interact so closely and therefore coordination and integration becomes unnecessary. Rationale: Jeffrey Pfeffer, author of The Human Equation, suggests that teams have three primary advantages. First, teams substitute peer-based control for hierarchical control of work activities, reducing the time and energy management needs to devote to control. Second, teams frequently develop more creative solutions to problems since they encourage sharing of tacit knowledge. Third, teams permit the removal of layers of hierarchy and absorption of administrative tasks previously performed by specialists. 70. Organizations are increasingly using teams for many reasons. The difference between a good team and an outstanding team has been found to be _____________. A. the combined technical skills of the members B. similarities in the way team members solve problems C. the way team members treat each other D. similarities in the age and experience of team member Answer: C. the way team members treat each other Rationale: The key difference between good teams and truly superior teams was the way members treated each other, the degree to which they believed in one another and created an atmosphere of encouragement rather than competition. Vision, talent, and motivation could carry a team only so far. 71. Which of the following is NOT a disadvantage of the barrier-free form of organization? A. Lack of strong leadership can lead to coordination problems. B. Democratic process can be time-consuming and difficult to manage. C. Additional integration issues result is a slower response to market changes. D. If trust among employees is not sufficiently high, organizational performance may suffer. Answer: C. Additional integration issues result is a slower response to market changes. Rationale: A barrier-free structure enables a quicker response to market changes through a single-goal focus, but lacks strong leadership and common vision, which can lead to coordination problems, is time-consuming, and has difficult-to-manage democratic processes, and sometimes lacks high levels of trust, which can impede performance. 72. What type of organization is defined as a central hub surrounded by networks of outside suppliers and specialists? A. matrix organization B. virtual organization C. modular organization D. barrier-free organization Answer: C. modular organization Rationale: The modular organization becomes a central hub surrounded by networks of outside suppliers and specialists and parts can be added or taken away. Both manufacturing and service units may be modular. 73. What is the name of the practice that many modular organization use to grow? A. operational effectiveness B. outsourcing C. strategic leveraging D. strategic enabling Answer: B. outsourcing Rationale: The modular organization outsources nonvital functions, tapping into the knowledge and expertise of best in class suppliers, but retains strategic control. 74. What advantages does outsourcing not provide an organization? A. accessing best in class goods and services B. enabling rapid expansion with relatively low capital investment C. focusing scarce resources on core competencies D. improved buyer positioning Answer: D. improved buyer positioning Rationale: In a modular company, outsourcing the noncore functions offers several advantages. A firm can tap into the knowledge and expertise of best in class suppliers, can focus scarce resources on the areas where it holds a competitive advantage, and the modular structure enables a company to leverage relatively small amounts of capital and a small management team to achieve seemingly unattainable strategic objectives. 75. Which of the following is NOT a strategic risk of outsourcing? A. loss of critical skills B. loss of cross-functional skills C. loss of control over a supplier D. loss of non-vital functions Answer: D. loss of non-vital functions Rationale: The main strategic concerns of outsourcing are (1) loss of critical skills or developing the wrong skills, (2) loss of cross-functional skills, and (3) loss of control over a supplier. 76. Nike is a company that makes use of the concept of product expatriates. Product expatriates are _____________. A. managers from the home country sent abroad to oversee the marketing of company products B. managers from suppliers who come to work at the company headquarters C. managers of the company sent abroad to work at the plants of its suppliers D. local nationals hired by the company in the countries from which it sources products Answer: C. managers of the company sent abroad to work at the plants of its suppliers Rationale: The outsourced products may give suppliers too much power over the manufacturer. Suppliers that are key to the success of the manufacturer can hold the manufacturer hostage. Nike manages this potential problem by sending full-time product expatriates to work at the plants of its suppliers. 77. The phrase that best defines a virtual organization is _____________. A. a dot-com company B. a type of modular structure C. an organization that uses information technology to integrate different functions D. a continually evolving network of independent companies Answer: D. a continually evolving network of independent companies Rationale: The virtual organization can be viewed as a continually evolving network of independent companies (suppliers, customers, even competitors) linked together to share skills, costs, and access to the markets of each other. 78. A virtual organization may be most appropriate for firms _____________. A. whose strategies require merging technologies B. whose product life cycles are just beginning C. who have no need to get to market quickly with new offers D. who have no need to meet competitive pressures Answer: A. whose strategies require merging technologies Rationale: This new structure may be appropriate for firms whose strategies require merging technologies (e.g., computing and communication) or for firms exploiting shrinking product life cycles that require simultaneous entry into multiple geographical markets. It may be effective for firms that desire to be quick to the market with a new product or service. 79. Virtual organizations ______________ whereas modular organizations _____________. A. are usually permanent; are usually temporary B. accept interdependent destinies; pursue collective strategies C. pursue collective strategies; forfeit strategic control D. give up part of their strategic control; retain full strategic control Answer: D. give up part of their strategic control; retain full strategic control Rationale: Unlike the modular type, in which the local firm maintains full strategic control, the virtual organization is characterized by participating firms that give up part of their control and accept interdependent destinies. 80. Which of the following is not a disadvantage of virtual structures? A. difficulty in individual and organizational knowledge sharing B. potential loss of operational control among partners C. loss of strategic control over emerging technology D. difficulty in determining where one company ends and another begins due to close interdependencies Answer: A. difficulty in individual and organizational knowledge sharing Rationale: Virtual structures encourage individual and organizational knowledge sharing but make it harder to determine where one company ends and another begins, due to close interdependencies among players. Also, they may lead to potential loss of operational control among partners, or result in the loss of strategic control over emerging technology. 81. Coca-Cola, Ford Motor Company, H. J. Heinz, Nike, and Procter and Gamble are working together to develop plant-based plastics. Each company brings its own competency to the table. This collaboration is an example of a _____________. A. virtual organization B. modular organization C. horizontal organization D. vertical organization Answer: A. virtual organization Rationale: This is a virtual organization in which the collaboration between firms from apparently unrelated industries is to develop a technology that could potentially affect all products that use plastic as a component, a container, or a package. Each company that links up with others to create a virtual organization contributes only what it considers its core competencies. It will mix and match what it does best with the best of other firms by identifying its critical capabilities and the necessary links to other capabilities. 82. Organizations generally tend to become internally focused when faced with ______________ and _____________. A. resource scarcity; declining performance B. internal pressures; improving performance C. resource abundance; declining performance D. external pressures; resource abundance Answer: A. resource scarcity; declining performance Rationale: When an organization faces external pressures, resource scarcity, and declining performance, it tends to become more internally focused, rather than directing its efforts toward managing relationships with existing and potential external stakeholders. This may be the most opportune time for managers to evaluate the potential for adopting elements of modular, virtual, and barrier-free organizational types. 83. If a firm outsources some parts of its value chain in order to reduce costs and increase quality and at the same time engages in multiple alliances to penetrate new markets, this is a example of a firm using a ______________ of organizational types. A. combination B. boundaryless consortium C. bounded consortium D. barrier free collection Answer: A. combination Rationale: Designing an organization that simultaneously supports the requirements of the organization strategy, is consistent with the demands of the environment, and can be effectively implemented by the people around the manager is a tall order for any manager. The most effective solution is usually a combination of organizational types. That is, a firm may outsource many parts of its value chain to reduce costs and increase quality, engage simultaneously in multiple alliances to take advantage of technological developments or penetrate new markets, and break down barriers within the organization to enhance flexibility. 84. Tools and techniques used to achieve effective coordination and integration of key activities in an organization include all of the following except _____________. A. horizontal organization structures B. horizontal systems and processes C. horizontal diversification D. communications and information technologies Answer: C. horizontal diversification Rationale: Managers must select a mix and balance of tools and techniques to facilitate the effective coordination and integration of key activities. Some of the factors that must be considered include common culture and shared values, horizontal organizational structures, horizontal systems and processes, communications and information technologies, and human resource practices. 85. Effective ambidextrous organizations have alignment, which means that _____________. A. employees are rewarded according to both profit and sales growth B. managers are focused on growth opportunities C. there is a clear sense of how value is being created in the short-term and how activities are properly integrated and coordinated D. divisional-level goals are consistent with overall corporate goals Answer: C. there is a clear sense of how value is being created in the short-term and how activities are properly integrated and coordinated Rationale: Managers must effectively exploit the value of their existing assets and competencies. They need to have alignment, which is a clear sense of how value is being created in the short-term and how activities are integrated and properly coordinated. 86. Effective ambidextrous organizations maintain adaptability, which means that _____________. A. managers are focused on growth opportunities B. there is a clear sense of how value is being created in the short-term and how activities are properly integrated and coordinated C. divisional-goals are consistent with overall corporate goals D. managers must remain proactive in expanding and/or modifying their product-market scope to anticipate and satisfy market conditions Answer: D. managers must remain proactive in expanding and/or modifying their product-market scope to anticipate and satisfy market conditions Rationale: First, managers must explore new opportunities and adjust to volatile markets in order to avoid complacency. They must ensure that they maintain adaptability and remain proactive in expanding and/or modifying their product-market scope to anticipate and satisfy market conditions. 87. According to the study by OReilly and Tushman, effective ambidextrous structures had all of the following attributes except _____________. A. a clear and compelling vision B. managerial efforts were highly focused on revenue enhancement C. cross-fertilization among business units D. established units were shielded from the distractions of launching new businesses Answer: B. managerial efforts were highly focused on revenue enhancement Rationale: The study found many factors explained why ambidextrous organizations were more effective. A clear and compelling vision, consistently communicated by senior management was critical. The structure enabled cross-fertilization while avoiding cross-contamination. The established units were shielded from the distractions of launching new businesses, and they continued to focus all of their attention and energy on refining their operations, enhancing their products, and serving their customers. Essay Questions 88. How do organizational structures change as organizations grow and mature? What are the dominant patterns of growth? Answer: Organizational structures evolve as organizations grow and mature, typically transitioning from flat and informal structures to more hierarchical and formal ones. Dominant patterns include functional, divisional, and matrix structures, adapting to increased complexity and the need for specialization. 89. Describe the attributes of a simple organizational structure. What are the advantages and disadvantages associated with using the simple organizational form? Answer: A simple organizational structure features centralized decision-making under a single leader, fostering agility and direct communication. Advantages include flexibility and quick decision-making. Disadvantages include limited scalability and potential for confusion as the organization grows. 90. Describe the attributes of a functional organizational structure. What are the advantages and disadvantages associated with using the functional organizational form? Answer: A functional organizational structure groups employees by specialization (e.g., marketing, finance) under functional heads, promoting expertise and efficiency. Advantages include depth of knowledge and economies of scale. Disadvantages include functional silos and challenges in interdepartmental coordination. 91. Describe the attributes of a divisional organizational structure. What are the advantages and disadvantages associated with using the divisional organizational form? Answer: A divisional organizational structure organizes around products, services, or geographic regions, each with its own functional units. Advantages include focus on specific markets and flexibility. Disadvantages include duplication of resources and potential for competition among divisions. 92. Briefly describe the strategic business unit (SBU) and holding company organizational structures. Under what circumstances do organizations choose these forms of organizing? Answer: Strategic Business Unit (SBU) structures operate semi-autonomously, managing distinct product lines or businesses. Holding company structures oversee multiple independent businesses. Organizations choose these forms to foster innovation, manage diverse markets efficiently, or comply with regulatory requirements, tailoring structures to strategic goals and market dynamics. 93. Describe the attributes of a matrix organizational structure. What are the advantages and disadvantages associated with using the matrix organizational form? Answer: A matrix organizational structure combines functional and divisional structures, where employees report to both functional managers (e.g., marketing, finance) and project managers (e.g., product development, regional managers). Advantages include enhanced communication, flexibility, and resource optimization. Disadvantages include complexity, potential for power struggles, and dual reporting lines causing confusion. 94. Briefly describe global start-ups. What advantages do they have and what challenges do they face? Answer: Global start-ups are new ventures with an international focus from inception, leveraging digital technologies to access global markets swiftly. Advantages include access to diverse talent pools, larger customer bases, and potential for rapid growth. Challenges include navigating regulatory complexities, cultural differences, and operational logistics across borders. 95. Discuss how changes in the current workforce and the business environment have contributed to growth in the use of boundaryless organizational designs. Answer: Boundaryless organizational designs have grown due to increased globalization, digital connectivity, and a more diverse workforce. These designs emphasize flexibility, collaboration, and innovation across organizational boundaries, fostering agility and responsiveness in dynamic business environments. They facilitate knowledge sharing, cross-functional teamwork, and faster adaptation to market changes. 96. Discuss the uses and limitations of the barrier-free organizational structure. What is the role of teams in the barrier-free organization? Answer: Barrier-free organizational structure promotes open communication, collaboration, and quick decision-making by removing hierarchical barriers. It fosters innovation and employee empowerment but may struggle with role ambiguity and coordination challenges. Teams play a pivotal role by driving cross-functional collaboration, problem-solving, and achieving collective goals in a barrier-free environment. 97. Discuss the uses and limitations of the modular organizational structure. What is the role of outsourcing in the modular organization? Answer: Modular organizational structure divides the organization into self-contained units or modules, enhancing flexibility and specialization. It enables efficient scaling and adaptation but may face integration issues and dependency risks. Outsourcing plays a crucial role in modular organizations by allowing specialized tasks to be delegated to external vendors, optimizing resource allocation and cost efficiency. 98. Describe the virtual organizational form. How and why are organizations choosing to implement this approach to organizing? Provide examples of organizations that have used a virtual organizational structure. Answer: Virtual organizational form utilizes digital technologies to operate without physical boundaries, enabling remote work, global collaboration, and flexible resource allocation. Organizations adopt this approach for cost savings, access to global talent, and enhanced operational flexibility. Examples include GitLab, a fully remote company, and Upwork, a platform connecting freelancers worldwide. 99. Successful boundaryless organizations rely heavily on the relational aspects of organizations. Discuss the benefits and costs of what must be considered, when choosing to develop such relationships with internal and external stakeholders. Answer: Boundaryless organizations benefit from enhanced collaboration, innovation, and resource sharing across internal and external stakeholders. However, managing diverse relationships requires significant investment in trust-building, communication frameworks, and alignment of goals. Costs include potential conflicts, coordination challenges, and dependence on external partners' capabilities. 100. What are ambidextrous organizations? When should they be used and how can they be made effective? Answer: Ambidextrous organizations balance exploitation of existing capabilities with exploration of new opportunities. They should be used in dynamic environments where innovation and adaptation are critical for long-term success. Effectiveness requires clear strategic direction, separate structures for exploration and exploitation, and a culture supportive of both innovation and efficiency. Test Bank for Strategic Management: Text and Cases Gregory Dess, G.T. (Tom) Lumpkin, Alan Eisner, Gerry Mcnamara 9780077862527, 9781259278211, 9781259813955
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