Chapter 14 Caterpillar Caterpillar Announced Plans Cut Its Production

Document Type
Test Prep
Book Title
Effective Management 6th Edition
Authors
Chuck Williams
d.
income statements
e.
budgets
55. Which of the following statements about economic value added (EVA) is true?
a.
EVA is one of the best ways to answer the question, "Are we providing our customers
with expected value?"
b.
EVA is the amount by which profits (after expenses) exceed the cost of capital in a given
year.
c.
EVA is only useful to top managers.
d.
The final step in calculating EVA is to compute the net operating profit after taxes.
e.
All of these statements about economic value added are true.
56. When it comes to finances, the Balanced Scorecard focuses on one simple question. That question is
____.
a.
How are we performing for our shareholders?
b.
How do we look to our customers?
c.
Are we making a profit?
d.
What is the bottom line?
e.
Are we retaining enough earnings to allow for market growth?
57. Economic value added (EVA) is so important because it ____.
a.
demonstrates the importance of a business or subset of a business to customers
b.
makes managers at all levels pay much closer attention to how they run their segment of
the business
c.
causes managers and workers to maintain the status quo
d.
determines if a business or unit of a business is a star, question mark, cash cow, or dog and
the necessary action to follow
e.
is an improved form of the Balanced Scorecard approach to control
58. An article on public libraries contained the following statement: "The Balanced Scorecard helps
organize and run the library according to a specific strategic plan, while demonstrating the library's
value to the community as a whole." When dealing with the customer area of the Balanced Scorecard,
the article advised librarians to use customer surveys. Why might this be a poor strategy to use?
a.
It could create information overload.
b.
Customer surveys are never reliable.
c.
Stakeholders should not be involved in the creation of a Balanced Scorecard.
d.
Results may only reveal halo effects.
e.
Customer surveys are typically misleading, skewed to positive feedback.
59. Quality is typically defined and measured in three ways. They are ____.
a.
costs, profitability, and customer satisfaction
b.
value, customer satisfaction, and conformance to expectations
c.
profitability, reliability, and conformance
d.
excellence, value, and conformance to expectations
e.
performance, conformance, and reliability
60. ____ is a performance assessment in which companies identify which customers are leaving and the
rate at which customers are leaving.
a.
Customer subjectivity
b.
Customer satisfaction
c.
Customer defection
d.
Customer objectivity
e.
Customer benefitizing
61. An article on public libraries contained the following statement: "The Balanced Scorecard helps
organize and run the library according to a specific strategic plan, while demonstrating the library's
value to the community as a whole." When dealing with the ____ area of the Balanced Scorecard, the
article advised librarians to ask, "How can the library continue to improve and create value?"
a.
financial perspective
b.
policies and procedures perspective
c.
customer perspective
d.
internal business perspective
e.
innovation and learning perspective
62. An article on public libraries contained the following statement: "The Balanced Scorecard helps
organize and run the library according to a specific strategic plan, while demonstrating the library's
value to the community as a whole." Standards suggested to use with the ____ area of the Balanced
Scorecard include how quickly and effectively a new service can be offered and how the training staff
responds to its introduction.
a.
financial perspective
b.
policies and procedures perspective
c.
customer perspective
d.
internal business perspective
e.
innovation and learning perspective
63. When a company emphasizes ____ as its quality goal, managers must simultaneously control
excellence, price, durability, or other features of a product or service that customers strongly associate
with it.
a.
excellence
b.
value
c.
conformance to expectations
d.
profitability
e.
performance
64. A company makes only one product. The company is carefully evaluating what it learned in becoming
such a success to see if it could use the same strategy to expand internationally. Which perspective of
the Balanced Scorecard is this manufacturer emphasizing?
a.
financial perspective
b.
policies and procedures perspective
c.
customer perspective
d.
internal business perspective
e.
innovation and learning perspective
65. According to the text, which of the following levels produces the greatest minimization of waste?
a.
waste prevention and reduction
b.
recycle and reuse
c.
waste treatment
d.
waste disposal
e.
waste remarketing
66. Several extended-stay hotel chains ask guests to hang their towels so they can be reused as a way to
help the environment. This request reflects which stage of waste minimization?
a.
waste prevention and reduction
b.
recycle and reuse
c.
waste treatment
d.
waste disposal
e.
waste remarketing
67. Process modification, material/product substitution, and ____ are the three strategies used for waste
prevention and reduction.
a.
collective reuse
b.
modification of organizational culture
c.
process diversification
d.
good housekeeping
e.
product innovation
C&K Brewing Company
C&K Brewing Company is a microbrewery in western Canada. It produces Maiden’s Honor brand ale,
a dark beer called Warrior’s Cry, and several seasonal beers under the brand name Hearthfire. Its
owners George Claiborne and Pete Kunard both believe the brewery’s competitive advantage comes
from the duo having hired an experienced German brewmaster to oversee the production of its beers.
The brewmaster checks all of the ingredients before they are mixed together to make sure that each
component is of the highest possible quality and rejects those that are not. After the beer has brewed,
the brewmaster runs several tests on the beer to check for taste and clarity and throws out barrels that
are cloudy and/or bitter.
68. Refer to C&K Brewing. The brewmaster is in charge of which classical management function?
a.
leading
b.
organizing
c.
motivating
d.
controlling
e.
planning
69. Refer to C&K Brewing. The brewmaster has ____ which he uses to determine the quality of the beer
by comparing its clarity to that of the finest beer.
a.
standards
b.
benchmarks
c.
motivational cues
d.
informational cues
e.
undefined heuristics
70. Refer to C&K Brewing. The brewmaster uses ____ control when he tests the raw materials.
a.
concurrent
b.
incipient
c.
feedforward
d.
introductory
e.
simultaneous
71. Refer to C&K Brewing. The brewmaster uses ____ control when he tests the beer to see how it tastes.
a.
simultaneous
b.
feedback
c.
concurrent
d.
reactive
e.
bureaucratic
72. Refer to C&K Brewing. To maintain the reputations of the brewery and the brewmaster, the company
typically destroys about 8 percent of its production because the beer is not of a high enough quality.
This would be an example of ____ control.
a.
objective
b.
concertive
c.
bureaucratic
d.
sacrificing
e.
administrative
73. Refer to C&K Brewing. The company is considering using the Balanced Scorecard to evaluate
performance. As an integrated system, the Balanced Scorecard will ____.
a.
maximize the possibility of suboptimization
b.
make only production managers responsible for making a positive impact on the scorecard
c.
measure five different perspectives of organizational performance
d.
examine performance from a financial perspective as well as other perspectives
e.
be used as a concurrent control with financial measures
74. Refer to C&K Brewing. Which of the following statements about the Balanced Scorecard is true?
a.
The innovation and learning perspective of the Balanced Scorecard examines such
activities as how quickly the brewery can get a new beer to market.
b.
The Balanced Scorecard does not examine the brewery’s financial performance.
c.
The stakeholder perspective of the Balanced Scorecard looks at the brewery’s code of
ethics.
d.
Like the income statement, the Balanced Scorecard simply provides a snapshot of the
brewery’s performance.
e.
One of the major advantages associated with the Balanced Scorecard is its ability to
remove uncertainty from the brewery’s environment.
Interpublic
Interpublic, the world's third-biggest marketing services group, informed the SEC that it "had found
accounting errors resulting from incompetence as well as falsified books and records, violations of the
laws and company policies, and inappropriate customer charges" that required it to restate its earnings
for every year in the decade. Interpublic is guilty of overstating both its expenses and its revenues in its
earning reports. Interpublic blames its faulty revenue reporting on "inadequate procedures for review
of customer contracts." This fraudulent activity will more than likely result in a default on the
company's debt and the loss of its stock market listing.
75. Refer to Interpublic. Which traditional management function was Interpublic not using effectively
prior to its discovery of fraudulent activities?
a.
implementation
b.
goal-setting
c.
control
d.
suboptimization
e.
benchmarking
76. Refer to Interpublic. It appears that the control method Interpublic believed it should have used was
one that focused on whether rules and policies were being followed. This approach is called ____.
a.
bureaucratic control
b.
objective control
c.
suboptimal
d.
self-control
e.
concertive control
77. Refer to Interpublic. Why should Interpublic consider implementing the Balanced Scorecard?
a.
to eliminate the need for restructuring
b.
to maximize benchmarking opportunities
c.
to track internal and external environmental changes
d.
to minimize the chances of suboptimization
e.
for all of these reasons
Walgreens
Despite thirty straight years of increased revenues and profits, Walgreens found itself facing intense
competition from Costco, Wal-Mart, and CVS. However, the biggest and newest threat to Walgreens’
business was mail-order prescription sales managed by pharmacy benefit managers (PBMs) who work
closely with companies, insurers, and health maintenance organizations to reduce pharmaceutical
costs, which have been increasing an average of 13% per year. With Costco’s rock bottom prices,
Wal-Mart’s incredible volume-based purchasing power, and PBMs able to sell brand-name drugs and
generic drugs 27% and 53% cheaper than traditional drug stores (according to a government study),
Walgreens will have to tightly control its expenses to continue to be competitive.
In terms of efficiency, it costs Walgreens less to fill a prescription order (i.e., fulfillment costs)
than any other retailer in the business. PBMs, however, can still fill a prescription for half as much as
Walgreens. To get its fulfillment costs down, Walgreens reduced its pharmaceutical inventory supply
from 68 days (that is, if Walgreens quit ordering pharmaceuticals, it would be able to fill prescriptions
for 68 days before running out) to 41 days. This reduction saves the company nearly $2 billion a year.
Other steps to reduce expenses include no longer accepting American Express cards at Walgreens
stores. Every time a customer uses an American Express card to make a payment, the store pays
American Express a fee of 2.05%. By contrast, Visa and MasterCard charge 1.55%. While the
difference seems small, the savings amount to $50,000 on every $10 million of sales, which can add
up quickly given Walgreens’ $40 billion in annual sales. Finally, Walgreens keeps costs low in its
stores with one of the best employee retention rates in the industry. Howard Davidowitz, chairman of
Davidowitz & Associates, a retail consulting and investment banking firm, says, “Their pharmacists
don't turn over, which increases consumer trust in the pharmacist. The retention rate of store and
district managers is also high. This is such an advantage.” Walgreens is also using technicians who are
paid $16 an hour to fill more prescriptions. While pharmacists, who are paid $42 an hour, still review
all filled prescriptions, using technicians who are paid $16 an hour to fill more prescriptions clearly
reduces expenses.
Walgreens started its “Advantage 90” program, which it now offers through its mail-order system
and its stores. Walgreens believes that Advantage 90 will help it take sales away from other PBMs and
from other retail pharmacies, which have higher fulfillment costs. Advantage 90 is now used by 150
companies including Southwest Airlines, and Walgreen’s CEO maintains that it is cheaper than
mail-order PBMs.
78. Refer to Walgreens. If you managed a pharmacy chain that was trying to compete with Walgreen's,
you should use ____ to determine ways to improve business efficiency.
a.
benchmarking
b.
data decentralization
c.
information processing
d.
mirroring
e.
comparative criterion
79. Refer to Walgreens. Walgreens elected to reduce expenses by no longer accepting American Express
cards at Walgreens stores. This occurred during which step of the control process?
a.
situational analysis
b.
taking corrective action
c.
benchmarking
d.
minimizing suboptimization
e.
setting standards
80. Refer to Walgreens. When Walgreens’ managers responded to the threat of PBMs by creating
Walgreens Health Initiatives, its own PBM business, they were using ____ control.
a.
concurrent
b.
intermittent
c.
feedback
d.
feedforward
e.
synergistic
81. Refer to Walgreens. Walgreens’ implementation of a mail-order pharmacy business is only one change
that it will need to make as it contends with increasing costs and new competition. This statement
underlies the ____ nature of control.
a.
synergistic
b.
static
c.
reciprocal
d.
autonomous
e.
dynamic, cybernetic
82. Refer to Walgreens. When Walgreens’ managers changed how much inventory the company holds at a
time, they were affecting the ____ perspective of the balance scorecard.
a.
customer
b.
innovation and learning
c.
internal
d.
feedback
e.
external relations
WWYD Caterpillar
Caterpillar dominates the construction and earth moving equipment industry. However, Caterpillar has
not been able to master the cyclical nature of its industry. When the heavy machinery industry booms,
no one keeps up with demand. Caterpillar doubled its workforce the last time global demand surged.
But when the industry goes bust, factories are closed and tens of thousands of employees are laid off.
So, in sudden downturns, Caterpillar learned to switch from selling new equipment to refurbishing
used equipment, which is a profitable way to offset the boom-and-bust cycle to some extent. The
second way Caterpillar has dealt with sudden swings was to try to predict when they occur. The
problem, though, was that while it could generally predict when a shift in sales would occur,
Caterpillar couldn’t predict the severity. As a result, the last time a severe downturn occurred,
Caterpillar laid off 35,000 managers and workers out of 120,000 worldwide.
While almost all companies cut expenses, pay, and jobs during severe economic downturns,
few companies suffer the severe upturns and downturns that Caterpillar exists in its business. In a very
broad sense, Cat’s inability to manage these deep, quick upturns and downturns means that its business
is “out of control.” To be more precise, Caterpillar swings from dramatically outperforming it goals
(during good times) to being dramatically below goals (during bad times).
Guiding everyone in the company were three key goals. First, maintain cash flows and earn a
profit, even if Caterpillar was a smaller company than before. Second, maintain Caterpillar’s credit
rating. This was key to being able to handle the sudden recoveries or upturns that often followed
Caterpillar’s downturns. Third, keep paying the company’s stock dividend, so that investors would not
lose faith in Caterpillar, and thus decrease its ability to raise capital, which would hurt its ability to
expand. Caterpillar accomplished all three.
To get the company in control, new CEO Doug Oberhelman developed Caterpillar’s “trough
strategy” during the six-month period between being named CEO. Caterpillar’s “trough teams” used a
13-point list of priorities to maintain focus, such as cash flows, the health of their dealers and
suppliers, and the like.
A related approach is Caterpillar’s “lane strategy,” in which Caterpillar tells customers that
there are four “lanes” of products they can order. “First lane” products contain the most common and
popular options and packages (similar to buying a car), whereas “fourth lane” products are highly
specialized and customized. First lane products are delivered quickly, whereas Fourth lane products
take six months and cost more. The advantage for suppliers is that most of Cat’s customers choose
first lane products. That, in turn, helps Cat’s suppliers know exactly what they need to produce.
The core of Oberhelman’s strategy is for Caterpillar’s customers to make “more money using
our equipment rather than anybody else’s.” While Caterpillar’s equipment is more expensive than the
competition’s, after factoring in maintenance, down time, operating costs, how long the product will
last, and what you can sell it for when done, Cat’s products are a value in the marketplace. And when
Cat machines break, or need parts or service, Caterpillar’s dealer network is there to meet customers’
needs. CEO Oberhelman says, “Our dealers--that has been the source of our Cat brand advantage more
than most people really understand.
83. Refer to WWYD Caterpillar. The most problematic deviation that Caterpillar, its dealers, and suppliers
faced during economic downturns was related to which quadrant of the company’s balanced
scorecard?
a.
financial
b.
internal
c.
innovation
d.
learning
e.
customer
84. Refer to WWYD Caterpillar. What is cybernetic about the control of an industrial process?
a.
when managers regulate the process in a continuous loop
b.
when robotics are used to control the repeating process over time
c.
when daily attention is required from managers
d.
when endless feedback takes place during production
e.
when customers cancel orders
85. Refer to WWYD Caterpillar. A manager diverted parts from one window production unit to get more
output at the expense of another unit producing a similar model. When demand for that model
increased suddenly, he did not have enough to meet orders. This is an example of:
a.
supply and demand
b.
brand advantage
c.
suboptimization
d.
lane strategy
e.
cybernetica
86. Refer to WWYD Caterpillar. Although Caterpillar’s equipment is more expensive than the
competition’s, after factoring in maintenance, down time, operating costs, how long the product will
last, and what you can sell it for when done, Cat’s products are a value in the marketplace. Focusing
on value is part of the _____ quadrant of Caterpillar’s balanced scorecard:
a.
innovation and learning
b.
financial
c.
customer
d.
internal
e.
EVA
87. Refer to WWYD Caterpillar. CEO Doug Oberhelman developed Caterpillar’s “trough strategy” by
setting up “trough teams” and giving them a 13-point list of priorities to monitor to maintain focus,
such as cash flows, the health of their dealers and suppliers, and the like. The list is an example of:
a.
benchmarking
b.
standards
c.
deviations
d.
control loss risks
e.
objective control
88. Refer to WWYD Caterpillar. Caterpillar announced plans to cut its production of construction
equipment due to forecasted increases in steel prices. By discovering the problem with product inputs
and letting customers know that its output will fall short, Caterpillar used ____ controls.
a.
feedforward
b.
feedback
c.
concurrent
d.
stasis
e.
goal-based
SHORT ANSWER
1. List the steps in the basic control process and how you would respond to the statement, "Control is a
process that should be employed intermittently?"
2. Define benchmarking and list the three steps in this process.
3. Explain the term cybernetic and its relevance to the control process.
4. Identify and briefly define the three basic control methods.
5. List and briefly identify the five methods that managers can use to achieve control in their
organizations.
6. Some approaches to control tend to be more stressful for employees than others. Discuss how
bureaucratic and concertive control influence workers.
7. Briefly describe the Balanced Scorecard approach to control. Explain how it differs from the
traditional approach to control used in most companies.
8. How does financial control in the Balanced Scorecard approach differ from its use in the traditional
approach to control?
9. In an effort to determine of the effectiveness of their control system, how do most companies attempt
to determine how they are seen by their customers? What is wrong with this technique?
10. Identify which of the four perspectives from the Balanced Scorecard approach the topic of waste
minimization is related to. Specify the four levels of waste minimization in order (from that producing
the greatest minimization to that producing the smallest minimization).
ESSAY
1. Describe the nature of the control process. Identify its basic steps and the three basic methods of
control. Explain how specific policies and procedures related to grading used at a college or university
could be seen as an example of the control process, and specify which method(s) of control your
example(s) represent.
ANS:
2. Compare and contrast the nature and operational basis of the five methods of control available to
managers and organizations. Comment on whether it matters that a manager selects one method of
control over another in a given set of circumstances.
3. Identify and explain the Balanced Scorecard approach to control. Specify its advantages and how it
differs from the traditional approach to control used in most companies. Comment on which approach
(the traditional or balanced approach to control) is more likely to help a company adapt to a changing,
competitive marketplace.
4. What is economic value added (EVA)? Why it is so important in comparison to the traditional
approach to controlling financial performance?

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