Controlling

ControllingControlling

What Is Control?What Is Control?• ControlControl

Monitoring activities to ensure that they are being Monitoring activities to ensure that they are being accomplished as planned and of correcting any accomplished as planned and of correcting any significant deviationssignificant deviations

Ensures that activities are completed in ways that Ensures that activities are completed in ways that lead to the attainment of the organization’s goals.lead to the attainment of the organization’s goals.

Why Is Control Important?Why Is Control Important?• As the final link in management functions:As the final link in management functions:

PlanningPlanning Controls let managers know whether their goals and plans Controls let managers know whether their goals and plans

are on target and what future actions to take.are on target and what future actions to take. Empowering employeesEmpowering employees

Control systems provide managers with information and Control systems provide managers with information and feedback on employee performance.feedback on employee performance.

Protecting the workplaceProtecting the workplace Controls enhance physical security and help minimize Controls enhance physical security and help minimize

workplace disruptions.workplace disruptions.

Steps in the Control ProcessSteps in the Control Process

1.1. Measuring Actual PerformanceMeasuring Actual Performance Personal observation, statistical reports, oral Personal observation, statistical reports, oral

reports, and written reportsreports, and written reports Management by walking around (MBWA)Management by walking around (MBWA)

A phrase used to describe when a manager is out in the A phrase used to describe when a manager is out in the work area interacting with employeeswork area interacting with employees

Steps in the Control Process (cont’d)Steps in the Control Process (cont’d)

2.2. Comparing actual performance against a Comparing actual performance against a standardstandard Comparison to objective measures: budgets, Comparison to objective measures: budgets,

standards, goalsstandards, goals Range of variationRange of variation

The acceptable parameters of variance between actual The acceptable parameters of variance between actual performance and the standardperformance and the standard

Defining an Acceptable Range of Variation

Steps in the Control Process (cont’d)Steps in the Control Process (cont’d)

3.3. Taking managerial action to correct deviations Taking managerial action to correct deviations or inadequate standardsor inadequate standards Immediate corrective actionImmediate corrective action

Correcting a problem at once to get performance back on Correcting a problem at once to get performance back on tracktrack

Basic corrective actionBasic corrective action Determining how and why performance has deviated and Determining how and why performance has deviated and

then correcting the source of deviationthen correcting the source of deviation Revising the standardRevising the standard

Adjusting the performance standard to reflect current and Adjusting the performance standard to reflect current and predicted future performance capabilitiespredicted future performance capabilities

Capital Electricals’ Sales Performance for July (number of sets)

Managerial Decisions in the Control ProcessManagerial Decisions in the Control Process

Controlling for Organizational PerformanceControlling for Organizational Performance

• What Is Performance?What Is Performance? The end result of an activityThe end result of an activity

• What Is Organizational What Is Organizational Performance?Performance? The accumulated end results of all of the The accumulated end results of all of the

organization’s work processes and activitiesorganization’s work processes and activities Designing strategies, work processes, and work activities.Designing strategies, work processes, and work activities. Coordinating the work of employees.Coordinating the work of employees.

Organizational Performance Measures Organizational Performance Measures • Organizational ProductivityOrganizational Productivity

Productivity:Productivity: the overall output of goods and/or the overall output of goods and/or services divided by the inputs needed to generate services divided by the inputs needed to generate that output.that output. Output: sales revenuesOutput: sales revenues Inputs: costs of resources (materials, labor expense, and Inputs: costs of resources (materials, labor expense, and

facilities)facilities)

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

Organizational Performance Measures Organizational Performance Measures • Organizational EffectivenessOrganizational Effectiveness

Measuring how appropriate organizational goals are Measuring how appropriate organizational goals are and how well the organization is achieving its goals.and how well the organization is achieving its goals. Systems resource modelSystems resource model– The ability of the organization to exploit its environment in The ability of the organization to exploit its environment in

acquiring scarce and valued resources.acquiring scarce and valued resources. The process modelThe process model– The efficiency of an organization’s transformation process in The efficiency of an organization’s transformation process in

converting inputs to outputs.converting inputs to outputs.

Industry and Company RankingsIndustry and Company Rankings• Industry rankings on:Industry rankings on:

ProfitsProfits Return on revenueReturn on revenue Return on shareholders’ Return on shareholders’

equityequity Growth in profitsGrowth in profits Revenues per employeeRevenues per employee Revenues per dollar of Revenues per dollar of

assetsassets Revenues per dollar of Revenues per dollar of

equityequity

• Corporate Culture Corporate Culture AuditsAudits

• Compensation and Compensation and benefits surveysbenefits surveys

• Customer satisfactionCustomer satisfactionsurveyssurveys

Types of ControlTypes of Control• Feedforward ControlFeedforward Control

Prevents anticipated problems.Prevents anticipated problems.• Concurrent Control Concurrent Control

Takes place while an activity is in progress.Takes place while an activity is in progress.• Feedback ControlFeedback Control

Takes place after an actionTakes place after an action Provides evidence of planning effectivenessProvides evidence of planning effectiveness

Types of Control

Tools for Controlling Organizational Tools for Controlling Organizational Performance: Financial ControlsPerformance: Financial Controls• Traditional ControlsTraditional Controls

Ratio analysisRatio analysis LiquidityLiquidity LeverageLeverage ActivityActivity ProfitabilityProfitability

Budget AnalysisBudget Analysis Quantitative Quantitative

standardsstandards DeviationsDeviations

• Other MeasuresOther Measures Economic Value Added Economic Value Added

(EVA)(EVA) Market Value Added Market Value Added

(MVA)(MVA)

© 2007 Prentice Hall, Inc. All rights reserved. 18–18

Exhibit 18–10Exhibit 18–10 Popular Financial RatiosPopular Financial Ratios

© 2007 Prentice Hall, Inc. All rights reserved. 18–19

Exhibit 18–10Exhibit 18–10 Popular Financial Ratios (cont’d)Popular Financial Ratios (cont’d)

Tools for Controlling Organizational Tools for Controlling Organizational Performance: Financial Controls (cont’d)Performance: Financial Controls (cont’d)

• Other MeasuresOther Measures Economic Value Added (EVA)Economic Value Added (EVA)

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

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

Tools for Controlling Organizational Tools for Controlling Organizational Performance: Financial Controls (cont’d)Performance: Financial Controls (cont’d)• Other Measures (cont’d)Other Measures (cont’d)

Market Value Added (MVA)Market Value Added (MVA) The value that the stock market places on a firm’s past and The value that the stock market places on a firm’s past and

expected capital investment projectsexpected capital investment projects

If the firm’s market value (its stock and debt) exceeds the If the firm’s market value (its stock and debt) exceeds the value of its invest capital (its equity and retained earnings), value of its invest capital (its equity and retained earnings), then managers have created wealth.then managers have created wealth.

• The Practice of Managing EarningsThe Practice of Managing Earnings

Controlling Organizational PerformanceControlling Organizational Performance• Balanced ScorecardBalanced Scorecard

Is a measurement tool that uses goals set by Is a measurement tool that uses goals set by managers in four areas to measure a company’s managers in four areas to measure a company’s performance:performance: FinancialFinancial CustomerCustomer Internal processesInternal processes People/innovation/growth assetsPeople/innovation/growth assets

Is intended to emphasize that all of these areas are Is intended to emphasize that all of these areas are important to an organization’s success and that there important to an organization’s success and that there should be a balance among them.should be a balance among them.

Information ControlsInformation Controls• Purposes of Information ControlsPurposes of Information Controls

As a tool to help managers control other As a tool to help managers control other organizational activities.organizational activities. Managers need the right information at the right time and in Managers need the right information at the right time and in

the right amount. the right amount.

As an organizational area that managers need to As an organizational area that managers need to control.control. Managers must have comprehensive and secure controls in Managers must have comprehensive and secure controls in

place to protect the organization’s important information.place to protect the organization’s important information.

Information ControlsInformation Controls• Management Information Systems (MIS)Management Information Systems (MIS)

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

Controls and Cultural DifferencesControls and Cultural Differences• Methods of controlling employee behavior and Methods of controlling employee behavior and

operations can be quite different in different operations can be quite different in different countries.countries.

The Dysfunctional Side of ControlThe Dysfunctional Side of Control• Problems with Unfocused ControlsProblems with Unfocused Controls

Failure to achieve desired or intended results occur Failure to achieve desired or intended results occur when control measures lack specificitywhen control measures lack specificity

• Problems with Incomplete Control MeasuresProblems with Incomplete Control Measures Individuals or organizational units attempt to look Individuals or organizational units attempt to look

good exclusively on control measures.good exclusively on control measures.• Problems with Inflexible or Unreasonable Problems with Inflexible or Unreasonable

Control StandardsControl Standards Controls and organizational goals will be ignored or Controls and organizational goals will be ignored or

manipulated.manipulated.

Contemporary Issues in ControlContemporary Issues in Control• The right to personal privacy in the workplace The right to personal privacy in the workplace

versus:versus: Employer’s monitoring of employee activities in the Employer’s monitoring of employee activities in the

workplaceworkplace Employer’s liability for employees creating a hostile Employer’s liability for employees creating a hostile

environmentenvironment Employer’s need to protect intellectual propertyEmployer’s need to protect intellectual property

Remember: The computer on your desk Remember: The computer on your desk belongs to the company.belongs to the company.