Chapter 01
Introduction
Essay Questions
1. Enron was clearly a company riddled with fraud and its conduct drove it to bankruptcy.
The text argues that individual behavior was not the core of Enron's problems. What were
the problems with this corporation from an organizational architecture point of view?
Answer: Enron delegated an extraordinary amount of decision rights to lower-level
employees. At the same time, Enron lacked effective oversight and review of decisions made
by these employees. Second, performance was evaluated largely on near-term earnings
growth and success in closing deals. Third, the company offered enormous compensation to
its top performers, which encouraged excessive risk taking. The company's internal risk
management group was in charge of performance evaluations, but the performance
appraisals within the group were based in part on the recommendations of the individuals
making the deals.
,Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Introduction
2. What are the three critical aspects of corporate organization? Which of the three
components is most important for the success of a firm?
Answer: The three critical aspects of corporate organization are the assignment of decision
rights, the reward system, and the performance-evaluation system. The assignment of
decision rights is likely to be most important for the success of a firm.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
3. What are some of the ways in which risky borrowers cheated on housing loans?
Answer: Borrowers overstated their income and claimed "liar loans." Fraudulent borrowers
would recruit people to apply for more liar loans, provide unreliable home appraisals,
purchase homes at lower prices from the sellers, and pocket the difference.
Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
4. What was the main reason for "liar loans" to proliferate?
,Answer: The incentives to mortgage brokers were such that the more loans they generated,
the greater was their compensation. Therefore, the mortgage brokers had no incentive to go
behind the scenes to check the viability of repayment.
Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
5. Is there a relationship between a CEO's retirement and the R&D expenses in a firm?
Answer: There is. In many instances, a CEO reduces R&D expenses a few years before
retirement. This boosts earnings in these selected years. If the CEO's bonuses are linked to
earnings, then the CEO retires with a big package from reduced R&D, while the firm suffers
in the long run due to the failure of keeping up with innovation.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
6. DHL, a successful European company, is attempting to overcome various legal
problems in order to enter the U.S. market of overnight package delivery. Its two major
competitors would be FedEx and UPS. As DHL looks to set up a U.S. subsidiary, it wishes to
benchmark its organizational architecture. What should it do?
Answer: DHL should realize that a successful organizational architecture is more than a
collection of good ideas or good parts. A successful organization should be carefully
coordinated to align individuals' incentives with the firm's goals. DHL's organizational
architecture has survived in a European legal and regulatory environment. In contrast,
FedEx’s and UPS’s architectures have survived under the U.S. legal system in the market for
overnight delivery. There is no single "best" organizational form for all firms in all external
legal and market environments. Instead, the best organizational form for a firm depends
critically on its current business environment. DHL should be aware of possible unintended
side effects of changing one component of organizational architecture without considering
its effects on the other parts of organizational architecture.
, Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Economic Darwinism
7. How can good management practices be useful in a global economy?
Answer: The example of Tianjin Optical & Electrical Communication Group in China and its
collaboration with Motorola comes to mind. Tianjin was a failing company. But, with the
adoption of U.S. telecommunications quality-control and management practices, it has
succeeded. Joint ventures such as these are likely to be useful if the foreign companies adopt
U.S. management tools in terms of supervision, control, and rewards.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Purpose of the Book
8. Explain why the top executives of Société Générale are more likely to be blamed than
Jérôme Kerviel.
Answer: Kerviel had been playing the markets for over a year and several red flags were
ignored by the bank managers. The supervisors accepted Kerviel's trades without much
difficulty. The managers were ready to go along, as long as Kerviel was not making any
money for himself, and as long as his activities were creating some benefit for the system.
The managers had embraced a system of risk taking. It is their irresponsibility primarily
that behooved Kerviel to behave the way he did.
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: Purpose of the Book
Introduction
Essay Questions
1. Enron was clearly a company riddled with fraud and its conduct drove it to bankruptcy.
The text argues that individual behavior was not the core of Enron's problems. What were
the problems with this corporation from an organizational architecture point of view?
Answer: Enron delegated an extraordinary amount of decision rights to lower-level
employees. At the same time, Enron lacked effective oversight and review of decisions made
by these employees. Second, performance was evaluated largely on near-term earnings
growth and success in closing deals. Third, the company offered enormous compensation to
its top performers, which encouraged excessive risk taking. The company's internal risk
management group was in charge of performance evaluations, but the performance
appraisals within the group were based in part on the recommendations of the individuals
making the deals.
,Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Introduction
2. What are the three critical aspects of corporate organization? Which of the three
components is most important for the success of a firm?
Answer: The three critical aspects of corporate organization are the assignment of decision
rights, the reward system, and the performance-evaluation system. The assignment of
decision rights is likely to be most important for the success of a firm.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
3. What are some of the ways in which risky borrowers cheated on housing loans?
Answer: Borrowers overstated their income and claimed "liar loans." Fraudulent borrowers
would recruit people to apply for more liar loans, provide unreliable home appraisals,
purchase homes at lower prices from the sellers, and pocket the difference.
Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
4. What was the main reason for "liar loans" to proliferate?
,Answer: The incentives to mortgage brokers were such that the more loans they generated,
the greater was their compensation. Therefore, the mortgage brokers had no incentive to go
behind the scenes to check the viability of repayment.
Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
5. Is there a relationship between a CEO's retirement and the R&D expenses in a firm?
Answer: There is. In many instances, a CEO reduces R&D expenses a few years before
retirement. This boosts earnings in these selected years. If the CEO's bonuses are linked to
earnings, then the CEO retires with a big package from reduced R&D, while the firm suffers
in the long run due to the failure of keeping up with innovation.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Managerial Economics and Organizational Architecture
6. DHL, a successful European company, is attempting to overcome various legal
problems in order to enter the U.S. market of overnight package delivery. Its two major
competitors would be FedEx and UPS. As DHL looks to set up a U.S. subsidiary, it wishes to
benchmark its organizational architecture. What should it do?
Answer: DHL should realize that a successful organizational architecture is more than a
collection of good ideas or good parts. A successful organization should be carefully
coordinated to align individuals' incentives with the firm's goals. DHL's organizational
architecture has survived in a European legal and regulatory environment. In contrast,
FedEx’s and UPS’s architectures have survived under the U.S. legal system in the market for
overnight delivery. There is no single "best" organizational form for all firms in all external
legal and market environments. Instead, the best organizational form for a firm depends
critically on its current business environment. DHL should be aware of possible unintended
side effects of changing one component of organizational architecture without considering
its effects on the other parts of organizational architecture.
, Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Economic Darwinism
7. How can good management practices be useful in a global economy?
Answer: The example of Tianjin Optical & Electrical Communication Group in China and its
collaboration with Motorola comes to mind. Tianjin was a failing company. But, with the
adoption of U.S. telecommunications quality-control and management practices, it has
succeeded. Joint ventures such as these are likely to be useful if the foreign companies adopt
U.S. management tools in terms of supervision, control, and rewards.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Purpose of the Book
8. Explain why the top executives of Société Générale are more likely to be blamed than
Jérôme Kerviel.
Answer: Kerviel had been playing the markets for over a year and several red flags were
ignored by the bank managers. The supervisors accepted Kerviel's trades without much
difficulty. The managers were ready to go along, as long as Kerviel was not making any
money for himself, and as long as his activities were creating some benefit for the system.
The managers had embraced a system of risk taking. It is their irresponsibility primarily
that behooved Kerviel to behave the way he did.
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: Purpose of the Book
