Strategic Management and Business Policy - Chapter 11

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Evaluation and Control
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1

The evaluation and control process ensures that the company is achieving what it set out to accomplish.

TRUE

2

Evaluation and control information consists only of performance data.

FALSE

3

One of the obstacles to effective control is the difficulty in developing appropriate measures of important activities and outputs.

TRUE

4

Performance is the end result of activity.

TRUE

5

One example of a steering control used by retail stores is the inventory turnover ratio, which shows how hard an investment in inventory is working.

TRUE

6

Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and orders from a superior.

TRUE

7

ISO 9000 Standards Series, developed by the International Standards Association of Geneva, Switzerland, is an example of a behavior control.

TRUE

8

Behavior, output, and input controls are all interchangeable.

FALSE

9

ABC is an accounting method for allocating direct and fixed costs to individual products.

FALSE

10

ABC accounting allows accountants to charge costs more accurately than the traditional method because it allocates overhead far more precisely.

TRUE

11

Enterprise risk management is being adopted because of the increasing amount of environmental uncertainty that can affect an entire corporation.

TRUE

12

ROI stands for return on incentives.

FALSE

13

One advantage of using ROI is that it is a single comprehensive figure that includes all revenues, costs, and expenses.

TRUE

14

Operating cash flow is also known as free cash flow.

FALSE

15

Stickiness and eyeballs are two non-financial performance measures used by Internet business ventures.

TRUE

16

EVA may eventually replace ROI as the standard performance measure.

TRUE

17

Unlike ROI, managers cannot manipulate the numbers of EVA.

FALSE

18

The balanced scorecard combines financial measures that tell the results of actions already taken with operational measures on customer satisfaction, internal processes, and the corporation's innovation and improvement activities.

TRUE

19

Management audits have been developed to evaluate activities such as corporate social responsibility, functional areas such as the marketing department, and divisions such as the international division.

TRUE

20

The revenue center is measured in terms of efficiency.

FALSE

21

A profit center is typically established whenever an organizational unit has control over both its resources and its products or services.

TRUE

22

Benchmarking has been decreasing in popularity as companies emphasize uniqueness.

FALSE

23

Benchmarking involves openly learning how others do something better than one's own company so that one not only can imitate, but perhaps even improve on their current techniques.

TRUE

24

In one study, 95% of the corporate officers interviewed stated that they use different evaluation techniques for foreign and domestic operations.

FALSE

25

International transfer pricing is primarily used not to evaluate performance, but to minimize taxes.

TRUE

26

Among the most important barriers to international trade are the different standards for products and services.

TRUE

27

The multi-domestic MNC and the global MNC should use loose controls on its foreign units.

FALSE

28

One of the key reasons for the success of Walmart has been management's use of the company's sophisticated information system to control purchasing decisions.

TRUE

29

ERP software provides instant access to critical information to everyone in the organization from the CEO to the factory floor worker.

TRUE

30

The use of timely, quantifiable standards guarantees good performance.

FALSE

31

People tend to substitute behaviors that are recognized and rewarded for those behaviors that are ignored, without regard to their contribution to goal accomplishment.

TRUE

32

The over-billing of customers in Sears's auto repair shops was an example of suboptimization.

FALSE

33

According to the 80/20 rule, companies should monitor the 20% of the factors that determine 80% of the results.

TRUE

34

The long-term evaluation method encourages executives to look at developmental expenses as being different from expenses required for current operations

FALSE

35

Which one of the following is NOT a part of the evaluation and control of performance?

A) Establish corporate strategies.

B) Determine what to measure.

C) Establish standards for performance.

D) Measure actual performance.

E) Take corrective actions.

Answer: A

36

If performance data and activity reports indicate undesirable performance as a result of inappropriate use of the strategic management process, operational managers must

A) immediately notify the board of directors.

B) change the strategic management model.

C) know about it so that they can correct the employee activity.

D) allow sufficient time to pass to verify if it is the process or just the usage that is the problem.

E) check the performance data to ensure their accuracy and take two more measurements.

Answer: C

37

The end result of activity is known as

A) measurement.

B) gratuity.

C) performance.

D) return on equity.

E) achievement.

Answer: C

38

Controls which measure variables that influence future profitability are called

A) steering controls.

B) activity controls.

C) behavior controls.

D) output controls.

E) influencing controls.

Answer: A

39

The inventory turnover ratio is an example of a(n)

A) steering control.

B) activity control.

C) behavior control.

D) output control.

E) influencing control.

Answer: A

40

Which type of control specifies how something is to be done through policies, rules, standard operating procedures, and orders from a superior?

A) tactical control

B) strategic control

C) output control

D) behavior control

E) functional control

Answer: D

41

Which type of control specifies what is to be accomplished by focusing on the end result of behaviors through the use of objectives and performance targets or milestones?

A) tactical control

B) strategic control

C) output control

D) functional control

E) behavior control

Answer: C

42

The ISO 9000 and 14000 Standards Series as a way to objectively document a company's high level of quality operations are examples of

A) tactical control.

B) strategic control.

C) output control.

D) functional control.

E) behavior control.

Answer: E

43

All of the following are examples of behavior controls EXCEPT

A) monitoring employees' phone calls.

B) monitoring employees' PCs.

C) monitoring employees' Internet usage.

D) using ISO 14000 Standards Series.

E) sales quotas.

Answer: E

44

All of the following are examples of output controls EXCEPT

A) sales quotas.

B) specific cost reduction objectives.

C) profit objectives.

D) getting to work on time.

E) surveys of customer satisfaction.

Answer: D

45

What percent of U.S. companies actively monitored their workers' website visits according to an American Management Association study?

A) 0%

B) 25%

C) 33%

D) 50%

E) 66%

Answer: E

46

Corporations will emphasize output controls when they are following a strategy of

A) concentric diversification.

B) conglomerate diversification.

C) retrenchment.

D) divestment.

E) vertical integration.

Answer: B

47

Corporations will emphasize all types of controls (output, input, and behavior) when they are following a strategy of

A) conglomerate diversification.

B) concentric diversification.

C) retrenchment.

D) divestment.

E) vertical integration.

Answer: B

48

Activity-based costing is a method of accounting which is very useful in making outsourcing decisions by doing

A) total quality management.

B) value-chain analysis.

C) reengineering.

D) MBO.

E) benchmarking.

Answer: B

49

________ is a corporate-wide, integrated process to manage the uncertainties that could negatively or positively influence the achievement of the corporation's objectives.

A) ISO 14000 Series

B) Input controls

C) Activity-based costing

D) Enterprise Risk Management

E) Market Value Added

Answer: B

50

Which is the MOST commonly used measure of corporate performance (in terms of profit)?

A) EPS

B) ROE

C) DPS

D) ROI

E) ROVA

Answer: D

51

A limitation of ROI as a measure of performance is that

A) it is a single comprehensive figure examining only one facet of the firm.

B) it provides disincentive to use existing assets efficiently.

C) it provides an incentive to acquire new assets.

D) it is very sensitive to depreciation policy.

E) it does not provide the basis for common comparison.

Answer: D

52

An advantage of ROI as a measure of performance is that

A) it is sensitive to book value.

B) it provides an incentive to use existing assets efficiently.

C) the time span of concern is short range.

D) the business cycle strongly affects ROI performance often despite managerial performance.

E) it is very sensitive to depreciation policy.

Answer: B

53

Which of the following is NOT considered an adequate measure by itself of corporate performance?

A) ROI

B) EPS

C) ROE

D) operating cash flow

E) all of the above

Answer: E

54

Some takeover specialists look at the amount of money a new owner can take out of the firm without harming the business. This is known as

A) leveraged buyout.

B) operating cash flow.

C) free cash flow.

D) dividends.

E) shareholder measure.

Answer: C

55

Because of the belief that accounting-based numbers such as ROI, ROE, and EPS are not reliable indicators of a corporation's economic value, which method of corporate performance is now preferred?

A) shareholder value

B) basic earning power

C) price/earnings ratio

D) profit margin on sales

E) return on assets

Answer: A

56

The present value of the anticipated future stream of cash flows from the business plus the value of the company if liquidated is referred to as

A) return on assets.

B) ROVA.

C) earnings per share.

D) shareholder value.

E) ROI.

Answer: D

57

The difference between the pre-strategy and post-strategy values for the business is

A) ROI.

B) EPS.

C) ROE.

D) EVA.

E) MVA.

Answer: D

58

Which of the following is a way in which managers can improve their company's or business unit's EVA?

A) earning more profit without using more capital

B) using more capital

C) investing capital in multiple low-return projects

D) extending their line of credit

E) all of the above

Answer: A

59

Which of the following is NOT one of the areas in which goals or objectives should be developed for use in the balanced scorecard approach?

A) customer

B) innovation and learning

C) financial

D) stakeholder

E) internal business perspective

Answer: D

60

The balanced scorecard approach to evaluation and control assigns to each goal/objective in an area one or more measures that are each essential for achieving a desired strategic option. These measures are called

A) critical success factors.

B) strategic factors.

C) key performance measures.

D) behavioral measures.

E) responsibility centers.

Answer: C

61

Which of the following is NOT descriptive of responsibility centers?

A) They are used to the extent that they can isolate specific functional units such as R&D.

B) Each responsibility center has its own budget and is evaluated on its use of budgeted resources.

C) The responsibility center coordinates all the functional areas and project developments to implement the strategic decision plan.

D) The center uses resources to produce a service or a product.

E) A responsibility center is headed by the manager responsible for the center's performance.

Answer: C

62

The comparison of the expected cost of production against the actual cost of production typically occurs in the

A) investment center.

B) revenue center.

C) standard cost center.

D) profit center.

E) expense center.

Answer: C

63

What responsibility center is judged for effectiveness rather than efficiency?

A) investment center

B) revenue center

C) standard cost center

D) profit center

E) expense center

Answer: B

64

A responsibility center which measures resources in dollars without consideration of service or product costs is called a(n)

A) investment center.

B) revenue center.

C) expense center.

D) profit center.

E) standard cost center.

Answer: C

65

A responsibility center which measures performance in terms of the difference between revenues (which measure production) and expenditures (which measure resources) is a(n)

A) investment center.

B) revenue center.

C) expense center.

D) profit center.

E) standard cost center.

Answer: D

66

A type of responsibility center which is typically established whenever an organizational unit has control over both its resources and its products or services is a(n)

A) investment center.

B) revenue center.

C) expense center.

D) profit center.

E) standard cost center.

Answer: D

67

Return on investment (ROI) is the most widely used measure of performance in what responsibility center?

A) revenue center

B) expense center

C) investment center

D) profit center

E) standard cost center

Answer: C

68

A multidivisional corporation like GE would tend to use what type of responsibility center?

A) expense center

B) investment center

C) profit center

D) standard cost center

E) revenue center

Answer: B

69

The continual process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders is

A) total quality management.

B) benchmarking.

C) action planning.

D) reengineering.

E) management by objectives.

Answer: C

70

Which of the following is NOT one of the steps followed in the benchmarking process?

A) Develop tactical programs for closing performance gaps.

B) Implement tactical programs, measure the results, and compare the results with those of the best-in-class company.

C) Implement activity-based costing.

D) Identify the area or process to be examined.

E) Calculate the differences among the company's performance measurements and those of the best-in-class company.

Answer: C

71

A study by Bain & Company revealed what percentage of companies using benchmarking in some manner?

A) 10%

B) 30%

C) 50%

D) 65%

E) 90%

Answer: D

72

The average benchmarking study may cost approximately ________, and involves 30 weeks of effort.

A) $5,000

B) $20,000

C) $50,000

D) $100,000

E) $500,000

Answer: D

73

A study of 79 MNCs revealed that international transfer pricing from one country unit to another is primarily used to

A) evaluate performance.

B) minimize taxes.

C) increase profits.

D) improve communication.

E) all of the above

Answer: B

74

Transferring profits from a foreign subsidiary to the parent corporation through dividends, royalties, or management fees is called

A) technology transfer.

B) activity-based costing.

C) transfer pricing.

D) repatriation of profits.

E) transnational funding.

Answer: D

75

A multi-domestic MNC should use what type of controls on its foreign units?

A) Management should be given considerable latitude, but be required to meet some predetermined performance targets.

B) Management should use a matrix structure allowing some limited autonomy of the foreign unit.

C) Management needs to exert tight controls over its many units using a centralized strategic operational decision-making format.

D) Management should use a functional approach assigning distinct and separate responsibilities to each department throughout the MNC.

E) Management should use a divisional approach assigning goals and targets for each product-group throughout the MNC.

Answer: A

76

A global MNC should use what type of controls over its foreign units?

A) Management should be given considerable latitude, but be required to meet some predetermined performance targets.

B) Management should use a matrix structure allowing some limited autonomy of the foreign unit.

C) Management needs to exert tight controls over its many units using a centralized strategic operational decision-making format.

D) Management should use a functional approach assigning distinct and separate responsibilities to each department throughout the MNC.

E) Management should use a divisional approach assigning goals and targets for each product-group on all its foreign units collectively.

Answer: C

77

The German company SAP AG originated the concept of ERP with its

A) activity-based costing.

B) transfer pricing.

C) spreadsheet software.

D) R/3 software system.

E) transnational software integrator.

Answer: D

78

The union of all of a company's major business activities from order processing to production within a single family of software modules is known as

A) enterprise resource planning.

B) enterprise strategic planning.

C) information system planning.

D) united resource planning.

E) united strategic planning.

Answer: A

79

Which of the following is NOT a reason why ERP could fail?

A) insufficient tailoring of the software to fit the company

B) inadequate training

C) simplicity of system

D) insufficient implementation support

E) all of the above

Answer: C

80

RFID

A) is radio frequency identification.

B) is an electronic tagging technology.

C) improves supply-chain efficiency.

D) is used as wireless computer passes for toll roads.

E) all of the above

Answer: E

81

Which one of the following is NOT one of the reasons why many executives do not conduct long-run performance evaluations while preferring to focus primarily on short-run performance?

A) They do not realize their importance.

B) They are not personally evaluated on a long-term basis.

C) They believe short-run considerations are more important than long-run considerations.

D) They do not have the time to make a long-run analysis.

E) They do not believe in strategic planning.

Answer: C

82

What term describes when activities originally intended to help managers attain corporate objectives become ends in themselves or are adapted to meet ends other than those for which they were intended?

A) economic rationality

B) minimal acceptable behavior

C) goal displacement

D) closed system thinking

E) Machiavellianism

Answer: C

83

Behavior substitution occurs when

A) a division or functional unit views itself as a separate entity and refuses to cooperate with other divisions or units in order to keep its performance measures at a high level.

B) there is a failure to produce at or near full capacity.

C) individuals are placed into positions not suited to their abilities.

D) individuals focus more of their attention on those aspects which are measurable than on those which are not.

E) managers concentrate too much on short-term performance objectives.

Answer: D

84

The U.S. Navy quip, "What you inspect (or reward) is what you get" reflects

A) behavior substitution.

B) suboptimization.

C) output control.

D) ERP.

E) none of the above

Answer: A

85

Which company experienced a tarnished reputation and scandal after experiencing behavior substitution when employees altered their behavior on the job to fit the reward system?

A) Sears, Roebuck, & Co.

B) J.C. Penney

C) Neiman Marcus

D) Saks

E) Macy's

Answer: A

86

Suboptimization occurs when

A) a division or functional unit views itself as a separate entity and refuses to cooperate with other divisions or units to the detriment of the organization as a whole.

B) there is a failure to produce at or near full capacity.

C) individuals are placed into positions not suited to their abilities.

D) managers tend to focus more of their attentions on those aspects which are measurable than on those which are not.

E) managers concentrate too much on short-term performance objectives.

Answer: A

87

If marketing attains its goal at the expense of rising production costs for the manufacturing department, the end result of marketing's achievements and manufacturing's cost increases reflects

A) behavior substitution.

B) suboptimization.

C) resource allocation.

D) resource optimization.

E) strategy optimization.

Answer: B

88

Which of the following is NOT a guideline for proper control?

A) Control should involve only a minimum amount of information.

B) Long-term as well as short-term controls should be used.

C) Controls should be timely so that corrective actions can be taken before it is too late.

D) Controls should measure all activities in order to be comprehensive.

E) Controls should emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet standards.

Answer: D

89

An emphasis on monitoring those few things which must go well to ensure corporate success is reflected in

A) the 60/40 rule.

B) the 30/70 rule.

C) the 80/20 rule.

D) success factors.

E) key performance measures.

Answer: C

90

The typical CEO pay package is composed of ________ long-term incentives.

A) 16%

B) 36%

C) 27%

D) 21%

E) 10%

Answer: A

91

A survey of 600 business units found that compensation programs emphasizing bonuses and other incentives were most used in those units emphasizing

A) stability strategies.

B) retrenchment strategies.

C) cooperative strategies.

D) international strategies.

E) growth strategies.

Answer: E

92

One approach to better match executive rewards to the accomplishment of strategic objectives is

A) return on investment.

B) year-end bonuses.

C) zero base budgeting.

D) weighted-factor method.

E) return on assets.

Answer: D

93

Which method of matching executive rewards to the accomplishment of strategic objectives is particularly appropriate for measuring and rewarding the performance of top SBU managers and group-level executives when performance factors and their importance vary from one SBU to another?

A) strategic-funds method

B) segmentation method

C) long-term evaluation method

D) individual evaluation method

E) weighted-factor method

Answer: E

94

Which method of matching rewards to the accomplishment of strategic objectives compensates managers for achieving objectives set over a multi-year period?

A) strategic-funds method

B) segmentation method

C) long-term evaluation method

D) individual evaluation method

E) weighted-factor method

Answer: C

95

When GE offered its CEO 250,000 performance share units tied to performance targets achieved over five years, it was using which method of matching rewards to the accomplishment of strategic objectives?

A) strategic-funds method

B) segmentation method

C) long-term evaluation method

D) individual evaluation method

E) weighted-factor method

Answer: C

96

According to the text, using a long-term performance evaluation system, a company executive might be promised incentives such as

A) company cars.

B) company stock.

C) health insurance.

D) retirement plans.

E) vacations.

Answer: B

97

Which method of matching rewards to the accomplishment of strategic objectives encourages executives to look at developmental expenses as being different from those expenses required for current operations?

A) strategic-funds method

B) segmentation method

C) long-term evaluation method

D) individual evaluation method

E) weighted-factor method

Answer: A

98

List the five-step feedback model of the evaluation and control process.

Answer: The five-step feedback model is composed of the following steps.

Determine what to measure.

Establish standards of performance.

Measure actual performance.

Compare actual performance with the standard.

Take corrective action.

Answer: The five-step feedback model is composed of the following steps.

Determine what to measure.

Establish standards of performance.

Measure actual performance.

Compare actual performance with the standard.

99

Distinguish between behavior and output controls. Provide examples of each.

Answer: Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and orders from a superior. Output controls specify what is to be accomplished by focusing on the end result of the behaviors through the use of objectives and performance targets or milestones. An example of a behavior control is a policy on arriving to work on time. An example of an output control is a sales quota.

Answer: Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and orders from a superior. Output controls specify what is to be accomplished by focusing on the end result of the behaviors through the use of objectives and performance targets or milestones. An example of a behavior control is a policy on arriving to work on time. An example of an output control is a sales quota.

100

What is the most commonly used measure of corporate performance (in terms of profits)? Discuss the limitations of using this measure.

Answer: The most commonly used measure of corporate performance (in terms of profits) is return on investment (ROI). It is simply the result of dividing net income before taxes by the total amount invested in the company. There are limitations to using this measure. ROI is very sensitive to depreciation. It can discourage investment in new facilities or upgrading of old ones. It provides an incentive for division managers to set transfer prices for goods sold to other divisions as high as possible. Managers tend to focus more on ROI in the short-run over its use in the long-run, providing an incentive for goal displacement. ROI is not comparable across industries. Finally, it is influenced by the overall economy.

101

What is the difference between EVA and MVA?

Answer: Economic value added (EVA) has become an extremely popular shareholder value method of measuring corporate and divisional performance and may be on its way to replacing ROI as the standard performance measure. EVA measures the difference between the pre-strategy and post-strategy value for the business. EVA is after-tax operating income minus the total annual cost of capital. Market value added (MVA) is the difference between the market value of a corporation and the capital contributed by shareholders and lenders. It measures the stock market's estimate of the net present value of a firm's past and expected capital investment projects. MVA is the present value of future EVA.

102

What is the balanced scorecard? What are the four areas to be addressed?

Answer: The balanced scorecard combines financial measures that tell the results of actions already taken with operational measures on customer satisfaction, internal processes, and the corporation's innovation and improvement activities — the drivers of future financial performance. Management should develop goals or objectives in each of four areas:

Financial (how do we appear to shareholders?)

Customer (how do customers view us?)

Internal business perspective (what must we excel at?)

Innovation and learning (can we continue to improve and create value?)

103

Discuss the benchmarking process.

Answer: Benchmarking is "the continual process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders." The benchmarking process usually involves the following steps:

Identify the area or process to be examined.

Find behavioral and output measures of the area or process and obtain measurements.

Select an accessible set of competitors and best-in-class companies against which to benchmark.

Calculate the differences among the company's performance measurements and those of the best-in-class and determine why the differences exist.

Develop tactical programs for closing performance gaps.

Implement the programs and then compare the resulting new measurements with those of the best-in-class companies.

104

What is ERP? What are the three reasons why ERP could fail?

Answer: ERP is enterprise resource planning. ERP unites all of a company's major business activities from order processing to production within a single family of software modules. The system provides instant access to critical information to everyone in the organization from the CEO to the factory floor worker.

The three reasons ERP could fail are insufficient tailoring of the software to fit the company, inadequate training, and insufficient implementation support.

105

Discuss the guidelines for proper control.

Answer: The following guidelines are recommended for proper control:

Control should involve only the minimum amount of information needed to give a reliable picture of events.

Controls should monitor only meaningful activities and results, regardless of measurement difficulty.

Controls should be timely so that corrective action can be taken before it is too late.

Long-term and short-term controls should be used.

Controls should aim at pinpointing exceptions.

Emphasize the reward of meeting or exceeding standards rather than punishments for failing to meet standards.