Lecture 6 - Internal Organization 1

Question 1

The allocation and definition of property is important in the market with respect to economic outcomes and efficiency (Coase Theorem), but is also important within firms.

The allocation/ definition of property rights within firms is referred to as ______

Answer 1

Decision rights

Question 2

“Optimum delegation” refers to delegation that leads to efficiency, taking into account:
A) number of hierarchical layers
B) degree of decentralization
C) degree of information asymmetry
D) degree of empowerment

Answer 2

A) number of hierarchical layers
B) degree of decentralization
D) degree of empowerment

Question 3

With respect to downward delegation from hierarchical superiors to hierarchical inferiors, decisions rights are typically _____ and not _____

Answer 3

Loaned and not owned

Question 4

The rights delegated from hierarchical superiors to inferiors are circumscribed, meaning that making decisions for personal gain unrelated to the gain of the firm is not allowed.
This is the definition of what term?

Answer 4

Constrained rights

Question 5

A study about decentralization and team organization by Acemoglu et al. (2007) found that:

A) younger firms in dynamic environments are becoming more decentralized
B) teams in younger firms in dynamic environments are increasingly using approaches such as Agile and Holacracy (team-work structure)
C) here is substantial evidence of delayering within young firms in dynamic environments

Select the right findings

Answer 5

All options are correct

Question 6

Delayering refers to the practice of removing layers in a hierarchy. This
implies a higher degree of delegation and decentralization

TRUE/FALSE

Answer 6

FALSE: delayering does not necessarily imply higher delegation and decentralization.

LEGO: pursued delayering simultaneously with expanding its management team and their responsibilities - with the objective of decreasing the distance between TMT and lower layers (i.e., not higher delegation or decentralization, but the opposite)

Question 7

A study by Nell, Foss, Klein & Schmitt (2020) studied digitalization’s effect on organizational delegation. Which of the following is(are) NOT findings:

A) advancement of digital communication tools will lead to firms adopting a more centralized approach
B) advancement of digital communication tools makes it easier for managers to monitor - reducing cost of managing
C) advancement of digital communication tools allows for more lateral (horizontal) communication rather than vertical
D) advancement of digital communication tools allows the corporate center to involve itself more in subunits business

Answer 7

C) advancement of digital communication tools allows for more lateral (horizontal) communication rather than vertical

The findings of the study was surprising - statement C was the initial expectation, but did not turn out to be observed

Question 8

A centralized firm entails that many hierarchical layers need to look evaluate a given idea. We see a _____ filter

Answer 8

Fined-grained filter

Question 9

A decentralized firm entails that few layers need to evaluate a given idea. We see a _____ filter

Answer 9

coarse-grained filter

Question 10

A _______ firm is good at rejecting projects, meaning that there is also an increased risk of rejecting good ones

Answer 10

Centralized firm

Question 11

A _______ firm is good at accepting projects, but will also have a higher risk of accepting more bad projects

Answer 11

Decentralized firm

Question 12

Consider a high-tech company with its corporate success deeply rooted in its ability to perform successful R&D and innovate. The firm faces hefty competition from other innovative industry players.

For such a firm, what is best-suited?

A) centralization of decision-making
B) decentralization of decision-making

Answer 12

CORRECT: B) decentralization:
Firms in industries with hefty competition and a strong emphasis on innovation benefit from having a flat organizational structure (decentralization)
“The real sin is if we miss something” (Bill Gates)

Question 13

Consider a firm responsible for approving new medicine to cure cancer.

For such a firm, what is best-suited?

A) centralization of decision-making
B) decentralization of decision-making

Answer 13

CORRECT: A) centralization: in this case, the firm (and society) is better off by wrongfully disproving than wrongfully approving. In the latter case, the medicine could have fatal effects on patients

Question 14

Consider a multi-sector conglomerate with a broad range of products all branded under its own brand (umbrella brand). Any performance of one product category will have strong spill-over effects on the brand’s remaining products.

For such a firm, what is best-suited?

A) centralization of decision-making
B) decentralization of decision-making

Answer 14

CORRECT: A) centralization: a bad product introduction will have negative spill-over effects on other product lines. Thus, a highly hierarchical organizational structure with centralized decision-making is beneficial to avoid “accepting a wrong idea”

Question 15

What are the benefits of delegation?
A) employee motivation and empowerment stemming from larger responsibility
B) co-location as a means for delegation enables optimal use of local and tacit knowledge difficult to transfer/codify/ communicate
C) speedy decision-making and economization of managerial time: managers can focus on the important decisions
D) all of the above
E) two of the above

Answer 15

D) All of the above

Question 16

The key organizational task of the top management is to choose the degree of delegation that maximizes value (efficient delegation).
Instruments that can help management steer the degree of delegation incl. which of the following? (Multiple may be correct)

A) job description
B) budgets given to hierarchical inferiors
C) rules and internal common law
D) all of the above
E) two of the above

Answer 16

D) all of the above
Job description: making clear before hiring how much decision-making authority the job prescribes
Budget: puts a limit on the degree of decision-making power delegated
Rules and internal common law: : making clear what is right and wrong

Question 17

The main disadvantage of delegation is agency costs, which includes costs associated with evaluation of mistakes and costs of coordinating interdependent activities in the face of change

TRUE/FALSE

Answer 17

TRUE

Question 18

In the delegation trade-off framework by Jensen and Meckling, when deciding on the optimal level of delegation, the firm faces two opposing cost curves - which are these?
A) cost of owing to inconsistent objectives/ agency problems
B) cost of knowledge transfer
C) cost of owing to poor information
D) cost of bounded rationality

Answer 18

A) cost of owing to inconsistent objectives/ agency problems
C) cost of owing to poor information

Question 19

One of the cost curves in the delegation trade-off framework by Jensen and Meckling is the “cost of owing to inconsistent objectives/ agency problems”. Which of the following statements is (are) correct about this cost curve?
A) consists of costs arising from lack of interest alignment (agency costs)
B) the curve is increasing as a function of decentralization/ delegation
C) the minimum point on this curve results in the optimum allocation of decision rights

Answer 19

CORRECT: A and B

Cost of owing to inconsistent objectives/ agency problems: cost arising from lack of interest alignment – i.e., agency costs. This curve is increasing as a function of decentralization/ delegation.

Question 20

One of the cost curves in the delegation trade-off framework by Jensen and Meckling is the “cost of owing to poor information”. Which of the following statements is (are) NOT correct about this cost curve?

A) consists of costs arising from sacrificing the benefits of delegation
B) entails costs arising from lack of usage of locak knowledge
C) entails costs arising from lack of fast responsiveness
D) the curve decreases as a function of centralization

Answer 20

WRONG: D) the curve INCREASES as a function of centralization

Question 21

In the delegation trade-off framework by Jensen and Meckling, the total organizational cost curve:

A) is a function of the cost of owing to inconsistent objectives and the cost of owing to poor information
B) shows the most efficient optimum allocation of decision rights at the curve’s minimum
C) increases with decentralization

Answer 21

A) is a function of the cost of owing to inconsistent objectives and the cost of owing to poor information
B) shows the most efficient optimum allocation of decision rights at the curve’s minimum

WRONG: C) it decreases with decentralization until MC of decentralization is equal to marginal benefits - at which point the curve will increase with decentralization

Question 22

Activity-based costing (ABC) is a costing method that enables clear identification of true costs associate with the activities of each department. I.e., costs can be monitored more precisely by managers.

How will an implementation of ABC impact the curves in Jensen and Meckling’s framework?

A) cost of owning to inconsistent objectives decreases
B) cost of owning to poor information decreases
C) total cost curve will increase
D) total cost curve will remain constant due to the offsetting effect that each curve has on the other

Answer 22

B) cost of owning to poor information decreases

ABC increases transparency with respect to the profitability of each department, making it easier for the manager to decentralize. The agency costs (cost of owning to poor information) decreases with higher information transparency

Question 23

Which of the following key words describe Oticon’s spaghetti organization?
A) steep hierarchy, centralized, heavily monitored, disciplinary measures implemented, many hierarchical layers
B) flat, decentralized, empowered, bottom-up, self-organized, value-driven, comprehensive performance measurements, compensation tied to performance, entrepreneurship encouraged

Answer 23

B) flat, decentralized, empowered, bottom-up, self-organized, value-driven, comprehensive performance measurements, compensation tied to performance, entrepreneurship encouraged

Question 24

According to Foss (2003), part of the explanation for why Oticon moved from the seemingly efficient spaghetti organization to a matrix structure was design flaws - what does this NOT entail?

A) relations to the TMT became overly important, giving rise to rent-seeking and biased decisions by TMT
B) linking pay to team and individual performance harmed knowledge sharing - projects became competitive
C) time-allocation/use was not registered - people signed up for too many projects without being held responsible for their effort in each
D) employees were given too much autonomy by management - there was a lack of management intervention

Answer 24

WRONG D) employees were given too much autonomy by management - there was a lack of management intervention
The opposite was the case - management intervened too much

Question 25

According to Foss (2003), part of the explanation for why Oticon moved from the seemingly efficient spaghetti organization to a matrix structure was management intervention and incentive problems. What does this entail?

A) although rights were delegated, TMT often overruled subordinates if they disagreed - harming motivation
B) TMT intervened too much, even though the organization was delayered - perceived by FTEs as erratic and clashing with espoused values
C) both of the above are correct

Answer 25

C) both of the above are correct

Question 26

Following Foss (2003), the reorganization of Oticon from spaghetti-organization to matrix-structure can be explained by:
A) coordination problem
B) cooperation problem
C) both

Answer 26

C) both

Coordination: people signed up for too many projects because they could - but failed to do well in all

Cooperation: TMT intervention harmed morale and incentives, whilst performance-based pay within groups and individually harmed knowledge-sharing behavour