67) If Brenda Thompson, Tom Mix’s supervisor, wanted to use a budgeting process to help
evaluate Tom’s performance but wanted to ensure that using a budget did not encourage Tom to
focus on short-term behaviors at the expense of long-term results, she should
A) develop the budget herself using realistic goals based on the economic reality facing Tom’s
function and use both quantitative and qualitative evaluations of the performance of Tom’s
function and then give the budget to Tom to follow.
B) work with Tom in an open and participative process to develop the budget based on the most
optimistic scenario possible and use both quantitative and qualitative evaluations of the
performance of Tom’s function.
C) develop the budget herself based on the most pessimistic scenario possible and use both
quantitative and qualitative evaluations of the performance of Tom’s function and then give the
budget to Tom to follow.
D) work with Tom in an open and participative process to develop the budget based on the
economic reality facing Tom’s function and use both quantitative and qualitative evaluations of
the performance of Tom’s function.
68) Evaluating a functional manager’s performance relative to budgets can be an effective control
when
A) the process used in developing budgets is open and participative.
B) the process reflects the economic best-case scenario developed by the functional manager.
C) the process reflects the economic worst-case scenario developed by the functional manager.
D) the process relies solely on quantitative criteria to evaluate the functional manager’s
performance.
69) Which committee in a U-form organization meets monthly and usually consists of the CEO
and each of the heads of the functional areas included in a firm?
A) Executive committee
B) Functional committee
C) Operations committee
D) Managerial committee
70) Which committee in a U-form organization meets weekly and reviews the performance of
the firm on a weekly basis and typically consists of a CEO and two or three functional senior
managers?
A) Top management team
B) Executive committee
C) Operations committee
D) Functional committee
71) Investments made by employees that have more value in a particular company than in
alternative companies are known as
A) firm-specific investments.
B) individual-specific investments.
C) group-specific investments.
D) corporate-specific investments.
72) According to the opportunism-based explanations of vertical integration, which of the
following would be the most appropriate type of compensation to support strategy
implementation?
A) Cash bonuses for corporate performance
B) Cash bonuses for group performance
C) Stock options for individual performance
D) Stock grants for individual performance
73) According to the capabilities-based explanations of vertical integration, which of the
following would be the most appropriate type of compensation to support strategy
implementation?
A) Salary
B) Cash bonuses for corporate performance
C) Cash bonuses for individual performance
D) Stock grants for individual performance
74) According to the flexibility-based explanations of vertical integration, which of the following
would be the most appropriate type of compensation to support strategy implementation?
A) Stock options for individual performance
B) Stock grants for individual performance
C) Stock grants for corporate performance
D) Cash bonuses for individual performance
75) ________ are payments to employees in a firm’s stock.
A) Stock grants
B) Cash grants
C) Flexibility grants
D) Option grants
76) ________ are when employees are given the right, but not the obligation, to purchase stock
at predetermined prices.
A) Flexibility grants
B) Stock grants
C) Stock options
D) Grant options
77) The ________ explanations call for compensation that focuses on individual employees,
such as cash bonuses for individual performance.
A) capabilities-based
B) strategically-based
C) flexibility-based
D) opportunism-based
78) Compensation that focuses on groups of employees such as cash bonuses and stock grants
are best suited for ________ explanations of vertical integration.
A) flexibility-based.
B) capabilities-based.
C) strategically-based.
D) opportunism-based
79) The ________ logic suggests that compensation that has a fixed and known downside risk
and significant upside potential is important for firms implementing vertical integration
strategies.
A) opportunism
B) strategic
C) capabilities
D) flexibility.
80) Firm-specific investments are a type of ________ investments.
A) operational
B) contingent
C) transaction-specific
D) horizontal
81) If Digipics were to begin manufacturing lenses for the cameras they assembled, this would
be an example of
A) backward vertical integration.
B) a strategic alliance.
C) forward vertical integration.
D) opportunism.
82) If Digipics were to begin selling the cameras it assembled directly to customers through a
website operated by the company, this would be an example of
A) backward vertical integration.
B) a strategic alliance.
C) forward vertical integration.
D) opportunism.
83) If one of the suppliers that Digipics purchases its components from purposefully delivered a
batch of its product that was substandard but did not inform Digipics of this, this would be an
example of
A) flexibility.
B) opportunism.
C) uncertainty.
D) vertical integration.
84) If Digipics were to agree to spend a significant amount of money to establish a new assembly
line for a large client, PicPro, that has unique needs that would make this assembly line largely
useless for any other customer, the funds Digipics spent in establishing this line would be an
example of
A) forward vertical integration.
B) backward vertical integration.
C) a transaction-specific investment.
D) opportunism.
85) The fact that it would be very costly for Digipics to alter its operations if the large customer
referred to in the previous question decided to stop doing business with Digipics suggests that
Digipics has ________ in this situation.
A) low flexibility
B) low opportunism
C) high flexibility
D) high opportunism
86) TerraLoc’s decision to manufacture the battery in-house is most consistent with which
explanation of vertical integration?
A) Flexibility-based explanations
B) Firm capability-based explanations
C) Alliance-based explanations
D) Opportunism-based explanations
87) TerraLoc’s development of the new battery technology is likely to
A) reduce the rarity of TerraLoc’s vertical integration strategy since competitors can purchase
batteries from other sources.
B) increase the rarity of TerraLoc’s vertical integration strategy since TerraLoc has reduced
uncertainties related to increased battery life in its products.
C) increase the imitability of TerraLoc‘s vertical integration strategy since competitors can
purchase traditional batteries from other sources.
D) decrease the imitability of TerraLoc’s vertical integration strategy since it increases
competitors’ flexibility.
88) TerraLoc is most likely to use the ________ organizational structure.
A) matrix
B) product-based multidivisional
C) functional
D) geography-based multidivisional
89) If TerraLoc were to use a U-form organizational structure and the CEO decided to use
budgets as a management control but wanted to make sure that the managers did not become too
focused on the short term, the CEO should do all of the following except
A) use an open process in developing budgets.
B) determine budgets for her managers and allow them to focus only on meeting the budgets.
C) use both quantitative and qualitative evaluations of managers’ performance.
D) make sure that the process used in developing budgets reflects the economic reality facing the
firm’s managers.
90) If TerraLoc wanted to expand into selling its GPS units through company-owned retail
stores, this would be an example of ________
A) forward vertical integration.
B) backward vertical integration.
C) opportunism.
D) a joint venture.
91) Define vertical integration and differentiate between forward vertical integration and
backward vertical integration.
92) Identify the three fundamental explanations of how vertical integration can create value and
discuss how value is created under each.
93) Discuss the opportunism-based explanation of vertical integration value creation and identify
when, under this explanation, firms should vertically integrate. In your answer be sure to clearly
define opportunism and the role that transaction-specific investments play in the opportunism-
based explanation.
94) Discuss the firm capabilities-based explanation of how vertical integration can create value.
In your discussion identify the two broad implications of this approach and when, under this
approach, firms should engage in vertical integration.
95) Discuss the flexibility-based explanation of vertical integration. In discussing this
explanation be sure to define flexibility, the role of uncertainty in this explanation, and identify
when, under this explanation, firms should engage in vertical integration.
96) Within the flexibility-based approach to vertical integration when should firms engage in
strategic alliances instead of vertical integration, and what are the advantages of alliances under
these conditions?
97) Identify three reasons why a firm may be able to create value through vertical integration
when most of its competitors are not able to create value through vertical integration.
98) Identify the organizational structure that is used to implement a vertical integration strategy
and why from a CEO’s perspective coordinating functional specialists to implement a vertical
integration strategy almost always involves conflict resolution and how this conflict can be
resolved.
99) Discuss the role of the budgeting process as a control mechanism in vertically integrated U-
form organizations, the potential unintended negative consequence budgets can have, and three
things CEOs can do to counter this potential consequence.
100) What type of compensation approach goes best with the flexibility explanation of vertical
integration?