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•  Do you agree with the following statement: “If specific knowledge about, for example, the different markets in which the firm operates is widespread throughout the organization, this typically implies a greater emphasis on management control?” Explain your answer with a maximum of 40 words (4 points max).

  Answer: Yes / No
  
  Explanation: Yes => more specific knowledge spread throughout the firm necessitates the delegation of decision rights (as specific knowledge increases knowledge transfer costs). To address the control problem that follows from delegation of decision rights, firms need (more) management control.

• 2. Do you agree with the following statement: “Action controls are more suitable in firms where top-level management has extensive working experience in various divisional management positions throughout the organization?” Explain your answer with a maximum of 40 words (4 points max).

  Answer: Yes / No
  
  Explanation: Yes => because action controls require that supervisors know which actions are best (and that actions can be directly monitored). Working experience in divisional positions helps them since they have own experience what works best.

• Do you agree with the following statement: “If strong interdependencies between operations of different divisions exist, it is more useful to use divisional performance measures instead of firm-level measures for performance evaluation?” Explain your answer with a maximum of 40 words (4 points max).

  Explanation: No => because you then incentivize divisional managers to only focus on their own operations instead of also cooperating with other divisions. In addition, divisional measure is more noisy because of the impact other divisional manager on their own operations.

• Do you agree with the following statement: “When retail store managers are obliged to report their sales figures on a daily basis to their superior manager, this may be interpreted as a relatively tight control?” Explain your answer with a maximum of 40 words (4 points max).

  Yes => because their results are monitored on a very frequent (i.e., daily) basis opposed to monitoring store performance on, for example, a monthly basis. Monitoring on a monthly basis would give retail store managers more autonomy within that given period (month).

• Sandino (2007) distinguishes in her paper different types of management control systems, where ‘basic management control systems’ are utilized in most firms.5. Do you agree with the following statement: “Basic management control systems are a good representation of contingency theory?” Explain your answer with a maximum of 40 words (4 points max).

  Explanation: No => Contingency theory argues that one size does not fit all firms (such as is the case with basic MCS which are employed by all firms), but instead every firm faces a different situation and has different characteristics and therefore needs a different type of control.

•  Do you agree with the following statement: “Firms that use a cost-leadership strategy (opposed to a differentiation strategy) typically put a greater emphasis on nonfinancial performance measures for performance evaluation and compensation purposes?” Explain your answer with a maximum of 40 words (4 points max).

  Explanation: No => earnings measure is a relatively congruent measure for firms that adopt cost-leadership strategies, so nonfinancial measures add little value for those firms. Formulated differently, nonfinancials add little information for firms that focus on cost-leadership strategies.

• Do you agree with the following statement: “Firms that emphasize the importance of coordination between different organizational units in their budgeting systems will typically have a higher fraction of managers that achieve their (sales) targets?” Explain your answer with a maximum of 40 words (4 points max).

  Explanation: Yes => for coordination purposes, firms need targets that are less challenging and more realistic. Managers are more likely to meet or beat less challenging targets.

• Banker et al. (2000) report for their hotel chain sample that nonfinancial measures are predictive of future financial performance. Provide two main reasons (max. 50 words) why the use of nonfinancial performance measures in evaluation and compensation systems may lead to dissatisfactory outcomes (6 points max).

  For example, i) nonfinancials often cannot be measured reliably, ii) relation between nonfinancials and financial outcomes is nonlinear, iii) relation between nonfinancials and financial outcomes moderated by other factors, iv) relation between nonfinancials and financial outcomes asymmetric, v) nonfinancials are susceptible to manipulation, etc. Short explanation required for each of these reasons.

• Which measure would you regard as more congruent for a top-level manager, stock market returns or firm profit? Explain your answer with a maximum of 40 words (4 points max).

  Stock market returns, as it also captures the wealth consequences of current investments that generate future accounting benefits. Accounting is too conservative, since a lot of investments need to be immediately expensed.

•  Do you agree with the following statement: “Performance measures such as profit facilitate the delegation of decision rights towards divisional managers to a greater extent, compared to nonfinancial performance measures such as customer satisfaction?” Explain your answer with a maximum of 40 words (4 points max).

  Explanation: Yes => profit is a summary measure and manager can decide herself on what ways to use in order to improve profit (so, it grants the autonomy to the manager). Nonfinancial measures imply greater guidance (less autonomy) provided towards lower-level employees.