MBA 540 Test

1. A pilot for a private jet stops for refueling in Omaha, Nebraska. Topper Fuels offers him a case of French wine to refuel with them (a total retail value of $324 to the pilot). For refueling, inspections, and minor repairs, Topper charges $2,700, $400 more than the least expensive fuel company. What has happened to the company that owns the private jet?

2. Jim Range owns a Best Ice Cream store, one of 1,000 franchises across the country. Jim doesn’t like to work evenings, so he hires Mary Jo Smith to work the store in the evening for $6.50 per hour. Mary Jo’s friends come by each evening and she gives them free cones. Is this an adverse selection problem or an incentive problem? What is the solution?

3. Independence Burgers serves fast food at its 300 franchised outlets across the South. The chain has recently found that (a) people are upgrading to restaurants when they eat out, (b) government regulation of beef has been tightened, and (c) modern food preparation technology makes central commissaries more cost effective. What should Independence Burgers be thinking about doing with its organizational architecture?

4. Missy Knowles is in charge of all technical developments at Gumby Polymer Rubber. She makes all the choices concerning product innovations in the company. She finds that she is overworked and that several of her research chemists seem to be spending work hours playing golf. What managerial advice would you provide to Gumby Polymer Rubber? Clearly explain your reasoning.

5. Decentralized decision-making is very controversial in a corporate environment. Central office managers feel like they are losing control of managers in specific plants or regional offices. What are some of the issues that must be reviewed before making the final decision on where to place final decision-making power?

6. Macrosoft is implementing a new research and design shop to integrate PC manufactures’ requirements for new computer software with Macrosoft’s operating system. The process of integration usually requires five different kinds of software modification tasks, plus decisions about integrating these modifications. Discuss the problems of designing the new jobs in this research and design shop.

7. Enhanced Computers specializes in rebuilding computers. Recently reorganized into geographic divisions, the southern division headed by Dan Unowsky is outperforming the other divisions in sales and profits. However, corporate executives have noticed that Unowsky no longer sends refurbished computers to other divisions, and he has instituted special warranties and pricing systems unavailable in the rest of the company. Should Unowsky be promoted or fired?

8. In the Bagby Copy Company case study, the executives are faced with wiring ten different copiers that they make five separate European countries. They must choose between specializing by country or specializing by manufacturing of copier type. The executives hire a lobbyist to work for a standard regulatory and sales environment across the entire European Union. Why?

9. The owners of Market Analysts, a business and economics consulting firm, are big believers in paying benchmark competitive wages. They pay all (non-legally specified) compensation in wages. If the employee wants a benefit, the company has an insurance program but it comes out of the paycheck. Market Analysts tend to hire very young workers just out of college. They are energetic and work hard, but after two years they tend to leave for other firms, taking valuable training lessons with them. If Market Analysts want to keep its employees, what changes should it make to the terms of employment offered to new employees?

10. Explain the effect of self-selection on compensating wage differential.

11. What are the factors that favor high incentive pay for an employee? Explain which of the five factors is the most important. Now provide a detailed, expressive fictional story showing how this concept plays out.

12. The DuPont case is a good example of an incentive package gone awry. In review, it placed a portion of employee’s pay into an “at-risk pool.” If the division had exceeded expectations, the employees would have received a bonus from the pool. How would a “relative performance contract” have saved the DuPont bonus system?

13. A few years ago the state legislature of a particular state passed a bill that increased funding for only those public universities that showed an increase in graduation rates. In two years, the bill was retracted. Why was the bill enforced in the first place just to be withdrawn so soon?

14. In 1992 the state of California charged Sears Auto Centers with overcharging customer for unneeded or unperformed repairs. Sears agreed to a settlement that could cost as much as $20 million. Sears had compensated its sales people with commissions based on total sales. Following the settlement, Sears dropped the commissions and went to a straight salary. Sears recently indicated that it is planning to reinstate commissions for salespeople in their Auto Centers. It even plans on paying commissions for selling customers brake jobs and wheel alignments. These two products were the core of the 1992 scandal. Sears says that it has taken steps to prevent recurrence of past problems. In particular, the decision right to recommend repairs is granted to mechanics who are paid a straight salary. Sales consultants are paid commissions for selling repair services but are not authorized to recommend repairs. Under the old system that caused problems, these individuals diagnosed repair problems and sold the corresponding service to customers. Why do you think Sears wants to reinstall commissions for its salespeople? Do you think that the new safeguard that separates diagnosing problems from selling services will prevent a recurrence of past problems? Explain.

15. Prominent management consultants sometimes argue that decision making in teams is usually more productive than decision making by individuals (important synergies arise when teams operate that are absent when individuals work by themselves). These consultants suggest that most companies have long failed to make proper use of teams. Their advice is that most firms should increase their use of teams significantly. Critique this advise.

16. Blue Cross Blue Shield of Rochester is Rochester’s largest health insurance provider. In exchange for the insurance premiums they pay, families insured by BCBS receive all their health care needs from a group of approximately 500 doctors approved by BCBS. (Families must choose their doctors from among these 500 doctors.)

When a patient insured by BCBS visits a doctor for a consultation, the patient pays a small copayment (usually $10). The doctor is reimbursed for the difference between the cost of the consultation and the copayment by RCIPA Corp. RCIPA Corp. is a firm owned by the 500 doctors who are BCBS-approved. At the beginning of each fiscal year, BCBS and RCIPA agree on a total dollar amount that BCBS will pay to RCIPA for medical services provided to patients covered by BCBS. BCBS further agrees that this dollar amount will not be adjusted for higher- or lower-than-expected medical care required by BCBS patients. RCIPA in turn pays member doctors, based on a fee schedule, for the medical services they provide to BCBS insured patients. If, at the end of the year, there is any money left over, it is distributed to

RCIPA members. If there is not enough money to pay for all the services provided by the member doctors, then the shortfall is allocated among the member doctors who must contribute cash to make up the shortfall.

Why do you think RCIPA serves as an intermediary between BCBS and the doctors who care for BCBS’s clients? Why would BCBS risk paying “too much” for the medical care of their customers? Why would RCIPA and its members risk being “underpaid” for their services? Is one of the two parties forcing the other to agree to such an arrangement? If so, who is forcing whom? Why?

17. In the early 1990s, Chrysler Corporation placed nearly all decision about the development of a new vehicle in the hands of a single, cross-functional product team. In contract, General Motors used an approach that placed a stronger emphasis on functional specialties. Small teams were established that consisted of experts from the same functional field. Each team was charged with a particular assignment that related to its area of specialization. For example, one team might have had the primary responsibility for the design of the body of the vehicle, whereas another team might have been charged with developing the drive train. The teams worked simultaneously on their specific tasks. . Some individuals on these teams also served on additional cross-functional teams that were charged with coordinating the development process across the functional areas. Discuss the relative advantages and disadvantages of these two approaches to product development.

18. Consider two states that are nearly identical in terms of such factors as income, climate, and population. There are public universities in both states. One state has a law, which specifies that all professors of a given rank (assistant, associate, and full professor) have to be paid the same. Thus an assistant professor, whether in history or in law, has to be paid the same. Associate professors are paid more than assistant professors. However, all associate professors have to be paid the same. The same is true for full professors. The other state does not have such as law. In this state, law professors are paid substantially more than history professors within each rank. The laws in both states allow the universities to choose their own teaching loads for faculty. These loads can vary across faculty members. (A) How do you expect the teaching loads to vary across the two states (you can focus on history and law departments)? Explain the economic reasoning behind your answer. (B) Are either history or law professors in the state with the law necessarily better or worse off than their counterparts in the state without the law? Explain. (C) Discuss how the residents of the state might be made worse off by such a law.

19. In 1995, Philip Morris Company ratified a new labor pact that gave employees stock in lieu of pay increases. The agreement covered 7,800 employees, with each employee being given 94 shares (1994 value of about $60 per share). Employees cannot sell the stock for at least a year and forfeit the stock if they quit or are fired before the year expires. Employee’s argued that the “deal was good for Philip Morris” because the employees’ base pay and fringe benefits did not rise. Also “current shareholders’ shares won’t be diluted, since employees probably will get less than 500,000 shares out of 850 million outstanding.” Discuss the pros and cons of this policy compared to a policy of simply giving a cash bonus to employees of a similar dollar value.

20. The United States Navy recently revamped its officer fitness report system.

Under the old system, officers were ranked into one of four categories, where 4.0 was the highest grade. This old system had been used for 20 years and grade inflation had become rampant. Eighty percent of all sailors routinely were ranked a perfect 4.0. One officer remarked, “Let’s face it, 85 percent of the people are 4.0 and 80 percent [of those] have every mark in 4.0.” A retired admiral commented, “The old system wasn’t entirely broke, it was just deteriorating over time and became less and less useful.”

The Navy decided to change the evaluation system because of the natural tendency for senior officers to promote their own subordinates over unknown sailors. Not everyone deserved a 4.0, but to get their own people promoted, senior officers had to play along because that’s what everyone else was doing. The new system requires each officer to be rated on a 1–5 scale in seven areas: professional expertise, leadership, support for equal opportunity programs, military bearing and appearance, teamwork, mission accomplishment, and interpersonal skills. The total points out of 35 possible are then used to provide an overall promotion recommendation:

• Clearly promote

• Must promote

• Promotable

• Progressing

• Don’t promote

The number of ratings in the top two categories—“clearly promote” and “must promote”— will be severely restricted to at most 20 percent of the evaluations. If an officer is evaluating 10 junior officers, at the most only 2 can receive the top two ratings.

What are the expected consequences of this new system? What are the likely outcomes? What are the pros and cons of the new system?