Foundations of Control

Chapter

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LEARNING OUTLINE
What Is Control and Why Is It Important? Define control. Contrast the three approaches to designing control systems. Discuss the reasons why control is important. Explain the planning-controlling link. The Control Process Describe the three steps in the control process. Explain why what is measured is more critical than how its measured. Explain the three courses of action managers can take in controlling.
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LEARNING OUTLINE
Controlling Organizational Performance

Define organizational performance. Describe the most frequently used measures of organizational performance.

Tools for Organizational Performance

Contrast feedforward, concurrent, and feedback controls. Explain the types of financial and information controls managers can use. Describe how balanced scorecards and benchmarking are used in controlling.
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LEARNING OUTLINE
Contemporary Issues in Control

Describe how managers may have to adjust controls for cross-cultural differences. Discuss the types of workplace concerns managers face and how they can address those concerns. Explain why control is important to customer interactions. Discuss what corporate governance is and how its changing.

What Is Control?

Controlling The process of monitoring activities to ensure that they are being accomplished as planned and of correcting any significant deviations.
The Purpose of Control To ensure that activities are completed in ways that lead to accomplishment of organizational goals.

Designing Control Systems

Market Control Emphasizes the use of external market mechanisms to establish the standards used in the control system. External measures: price competition and relative market share Bureaucratic Control Emphasizes organizational authority and relies on rules, regulations, procedures, and policies. Clan Control Regulates behavior by shared values, norms, traditions, rituals, and beliefs of the firms culture.
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Exhibit 181 Characteristics of Three Approaches to Control Systems

Type of Control Market Characteristics Uses external market mechanisms, such as price competition and relative market share, to establish standards used in system. Typically used by organizations whose products or services are clearly specified and distinct and that face considerable marketplace competition. Emphasizes organizational authority. Relies on administrative and hierarchical mechanisms, such as rules, regulations, procedures, policies, standardization of activities, well-defined job descriptions, and budgets to ensure that employees exhibit appropriate behaviors and meet performance standards. Regulates employee behavior by the shared values, norms, traditions, rituals, beliefs, and other aspects of the organizations culture. Often used by organizations in which teams are common and technology is changing rapidly.
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Bureaucratic

Clan

Why Is Control Important?

As the final link in management functions:

Planning Controls let managers know whether their goals and plans are on target and what future actions to take. Empowering employees Control systems provide managers with information and feedback on employee performance. Protecting the workplace Controls enhance physical security and help minimize workplace disruptions.
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Exhibit 182 The PlanningControlling Link

The Control Process

The Process of Control

1. 2.

Measuring actual performance. Comparing actual performance against a standard.

3.

Taking action to correct deviations or inadequate standards.

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Exhibit 183 The Control Process

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Measuring: How and What We Measure

Sources of Information (How)

Control Criteria (What)

Personal observation Statistical reports Oral reports Written reports

Employees

Satisfaction Turnover Absenteeism Costs

Budgets

Output
Sales
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Exhibit 184 Common Sources of Information for Measuring Performance

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Comparing

Determining the degree of variation between actual performance and the standard.

Significance of variation is determined by:

The acceptable range of variation from the standard (forecast or budget). The size (large or small) and direction (over or under) of the variation from the standard (forecast or budget).

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Exhibit 185 Defining the Acceptable Range of Variation

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Exhibit 186

Sales Performance Figures for July, Eastern States Distributors

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Taking Managerial Action

Courses of Action

Doing nothing

Only if deviation is judged to be insignificant.

Correcting actual (current) performance

Immediate corrective action to correct the problem at once. Basic corrective action to locate and to correct the source of the deviation. Corrective Actions

Change strategy, structure, compensation scheme, or training programs; redesign jobs; or fire employees
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Taking Managerial Action

Courses of Action

Revising the standard

Examining the standard to ascertain whether or not the standard is realistic, fair, and achievable.

Upholding the validity of the standard.

Resetting goals that were initially set too low or too high.

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Exhibit 187 Managerial Decisions in the Control Process

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Controlling for Organizational Performance

What Is Performance?

The end result of an activity

What Is Organizational Performance?

The accumulated end results of all of the organizations work processes and activities

Designing strategies, work processes, and work activities.

Coordinating the work of employees.

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Organizational Performance Measures

Organizational Productivity

Productivity: the overall output of goods and/or services divided by the inputs needed to generate that output.

Output: sales revenues

Inputs: costs of resources (materials, labor expense, and facilities)

Ultimately, productivity is a measure of how efficiently employees do their work.

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Organizational Performance Measures

Organizational Effectiveness Measuring how appropriate organizational goals are and how well the organization is achieving its goals. Systems resource model The ability of the organization to exploit its environment in acquiring scarce and valued resources. The process model The efficiency of an organizations transformation process in converting inputs to outputs. The multiple constituencies model The effectiveness of the organization in meeting each constituencies needs.
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Industry and Company Rankings

Industry rankings on:

Corporate Culture Audits

Compensation and benefits surveys Customer satisfaction surveys

Profits Return on revenue Return on shareholders equity Growth in profits Revenues per employee Revenues per dollar of assets Revenues per dollar of equity

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Exhibit 188 Popular Industry and Company Rankings

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Tools for Controlling Organizational Performance

Feedforward Control A control that prevents anticipated problems before actual occurrences of the problem. Building in quality through design. Requiring suppliers conform to ISO 9002. Concurrent Control A control that takes place while the monitored activity is in progress. Direct supervision: management by walking around.

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Exhibit 189 Types of Control

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Tools for Controlling Organizational Performance

Feedback Control

A control that takes place after an activity is done.

Corrective action is after-the-fact, when the problem has already occurred. Provide managers with information on the effectiveness of their planning efforts. Enhance employee motivation by providing them with information on how well they are doing.
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Advantages of feedback controls:

Tools for Controlling Organizational Performance: Financial Controls

Traditional Controls

Other Measures

Ratio analysis

Liquidity Leverage Activity Profitability

Economic Value Added (EVA) Market Value Added (MVA)

Budget Analysis

Quantitative standards
Deviations
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Exhibit 1810 Popular Financial Ratios

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Exhibit 1810 Popular Financial Ratios

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Tools for Controlling Organizational Performance: Financial Controls

Other Measures

Economic Value Added (EVA)

How much value is created by what a company does with its assets, less any capital investments in those assets: the rate of return earned over and above the cost of capital.

The choice is to use less capital or invest in high-return projects.

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Tools for Controlling Organizational Performance: Financial Controls

Other Measures Market Value Added (MVA)

The value that the stock market places on a firms past and expected capital investment projects If the firms market value (its stock and debt) exceeds the value of its invest capital (its equity and retained earnings), then managers have created wealth.

The Practice of Managing Earnings

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Controlling Organizational Performance

Balanced Scorecard

Is a measurement tool that uses goals set by managers in four areas to measure a companys performance:

Financial Customer Internal processes People/innovation/growth assets

Is intended to emphasize that all of these areas are important to an organizations success and that there should be a balance among them.
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Information Controls

Purposes of Information Controls

As a tool to help managers control other organizational activities.

Managers need the right information at the right time and in the right amount.

As an organizational area that managers need to control.

Managers must have comprehensive and secure controls in place to protect the organizations important information.

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Information Controls

Management Information Systems (MIS)

A system used to provide management with needed information on a regular basis.

Data: an unorganized collection of raw, unanalyzed facts (e.g., unsorted list of customer names). Information: data that has been analyzed and organized such that it has value and relevance to managers.

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Benchmarking of Best Practices

Benchmark

The standard of excellence against which to measure and compare.

Benchmarking

Is the search for the best practices among competitors or noncompetitors that lead to their superior performance. Is a control tool for identifying and measuring specific performance gaps and areas for improvement.

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Exhibit 1811 Steps to Successfully Implement an Internal Benchmarking Best Practices Program Connect best practices to strategies and goals.

1.

2.

Identify best practices throughout the organization.

3.

Develop best practices reward and recognition systems.

4.

Communicate best practices throughout the organization.

5.

Create a best practices knowledge-sharing system.

6.

Nurture best practices on an ongoing basis.

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Contemporary Issues in Control

Cross-Cultural Issues

The use of technology to increase direct corporate control of local operations

Legal constraints on corrective actions in foreign countries

Difficulty with the comparability of data collected from operations in different countries

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Contemporary Issues in Control

Workplace Concerns

Workplace privacy versus workplace monitoring: E-mail, telephone, computer, and Internet usage Productivity, harassment, security, confidentiality, intellectual property protection Employee theft The unauthorized taking of company property by employees for their personal use. Workplace violence Anger, rage, and violence in the workplace is affecting employee productivity.
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Exhibit 1812 Types of Workplace Monitoring by Employers

Source: American Management Association/ePolicy Institute Research, 2005 Electronic Monitoring & Surveillance Survey, American Management Association.

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Exhibit 1813 Control Measures for Employee Theft or Fraud

Sources: Based on A.H. Bell and D.M. Smith. Protecting the Company Against Theft and Fraud, Workforce Online (www.workforce.com) December 3, 2000; J.D. Hansen. To Catch a Thief, Journal of Accountancy, March 2000, pp. 4346; and J. Greenberg, The Cognitive Geometry of Employee Theft, in Dysfunctional Behavior in Organizations: Nonviolent and Deviant Behavior, eds. S.B. Bacharach, A. OLeary-Kelly, J.M. Collins, and R.W. Griffin (Stamford, CT: JAI Press, 1998), pp. 14793.

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Exhibit 1814 Workplace Violence

Witnessed yelling or other verbal abuse

42%

Yelled at co-workers themselves

Cried over work-related issues Seen someone purposely damage machines or furniture Seen physical violence in the workplace Struck a co-worker
Source: Integra Realty Resources, October-November Survey of Adults 18 and Over, in Desk Rage. BusinessWeek, November 20, 2000, p. 12.

29%
23% 14% 10% 2%

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Exhibit 1815 Control Measures for Deterring or Reducing Workplace Violence

Sources: Based on M. Gorkin, Five Strategies and Structures for Reducing Workplace Violence, Workforce Online (www.workforce.com). December 3, 2000; Investigating Workplace Violence: Where Do You Start? Workforce Online (www.forceforce.com ), December 3, 2000; Ten Tips on Recognizing and Minimizing Violence, Workforce Online (www.workforce.com), December 3, 2000; and Points to Cover in a Workplace Violence Policy, Workforce Online (www.workforce.com), December 3, 2000.

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Contemporary Issues in Control

Customer Interactions

Service profit chain

Is the service sequence from employees to customers to profit.

Service capability affects service value which impacts on customer satisfaction that, in turn, leads to customer loyalty in the form of repeat business (profit).

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Exhibit 1816 The Service Profit Chain

Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from Putting the Service Profit Chain to Work, by J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., and L. A. Schlesinger. March April 1994: 166. Copyright (c) by the President and Fellows of Harvard College. All rights reserved. See also J. L. Heskett, W. E. Sasser, and L. A. Schlesinger, The Service Profit Chain (New York: Free Press, 1997).

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Contemporary Issues in Control

Corporate Governance

The system used to govern a corporation so that the interests of the corporate owners are protected.

Changes in the role of boards of directors

Increased scrutiny of financial reporting (Sarbanes-Oxley Act of 2002)

More disclosure and transparency of corporate financial information Certification of financial results by senior management

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Terms to Know

controlling market control bureaucratic control clan control control process range of variation immediate corrective action basic corrective action performance organizational performance

productivity organizational effectiveness feedforward control concurrent control management by walking around feedback control economic value added (EVA) market value added (MVA)

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Terms to Know

management information system (MIS) data information balanced scorecard benchmarking employee theft service profit chain corporate governance

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