Foundations of Control Ch 18. What Is Control Control Control The process of monitoring activities to ensure that they are being accomplished as planned.

Foundations of Foundations of ControlControl

Ch 18Ch 18

What Is ControlWhat Is Control

ControlControl The process of monitoring activities to The process of monitoring activities to

ensure that they are being accomplished ensure that they are being accomplished as planned and of correcting any as planned and of correcting any significant deviations.significant deviations.

The Purpose of ControlThe Purpose of Control To ensure that activities are completed in To ensure that activities are completed in

ways that lead to accomplishment of ways that lead to accomplishment of organizational goals.organizational goals.

Designing Control SystemsDesigning Control Systems

Market ControlMarket Control Emphasizes the use of external market Emphasizes the use of external market

mechanisms to establish the standards used in mechanisms to establish the standards used in the control system.the control system. External measures:External measures: price competition and relative price competition and relative

market sharemarket share Bureaucratic ControlBureaucratic Control

Emphasizes organizational authority and relies on Emphasizes organizational authority and relies on rules, regulations, procedures, and policies.rules, regulations, procedures, and policies.

Clan ControlClan Control Regulates behavior by shared values, norms, Regulates behavior by shared values, norms,

traditions, rituals, and beliefs of the firm’s culture.traditions, rituals, and beliefs of the firm’s culture.

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 Controls let managers know whether their goals and plans are on target and what future actions to take.plans are on target and what future actions to take.

Empowering employeesEmpowering employees Control systems provide managers with information Control systems provide managers with information

and feedback on employee performance.and 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.

The Control ProcessThe Control Process

The Process of The Process of ControlControl1.1. Measuring actual Measuring actual

performance.performance.2.2. Comparing actual Comparing actual

performance against performance against a standard.a standard.

3.3. Taking action to Taking action to correct deviations or correct deviations or inadequate standards.inadequate standards.

Measuring: How and What Measuring: How and What We MeasureWe Measure

Sources of Sources of InformationInformation Personal Personal

observationobservation Statistical reportsStatistical reports Oral reportsOral reports Written reportsWritten reports

Control CriteriaControl Criteria EmployeesEmployees

SatisfactionSatisfaction TurnoverTurnover AbsenteeismAbsenteeism

BudgetsBudgets CostsCosts OutputOutput SalesSales

ComparingComparing

Determining the degree of variation Determining the degree of variation between actual performance and the between actual performance and the standard.standard. Significance of variation is determined by:Significance of variation is determined by:

The acceptable range of variation from the The acceptable range of variation from the standard (forecast or budget).standard (forecast or budget).

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

Taking Managerial ActionTaking Managerial Action

Courses of ActionCourses of Action ““Doing nothing”Doing nothing”

Only if deviation is judged to be insignificant.Only if deviation is judged to be insignificant. Correcting actual (current) performanceCorrecting actual (current) performance

Immediate corrective action to correct the problem at Immediate corrective action to correct the problem at once.once.

Basic corrective action to locate and to correct the Basic corrective action to locate and to correct the source of the deviation.source of the deviation.

Corrective ActionsCorrective Actions Change strategy, structure, compensation scheme, or Change strategy, structure, compensation scheme, or

training programs; redesign jobs; or fire employeestraining programs; redesign jobs; or fire employees

Taking Managerial Action Taking Managerial Action (cont’d)(cont’d)

Courses of Action (cont’d)Courses of Action (cont’d) Revising the standardRevising the standard

Examining the standard to ascertain whether Examining the standard to ascertain whether or not the standard is realistic, fair, and or not the standard is realistic, fair, and achievable.achievable. Upholding the validity of the standardUpholding the validity of the standard Resetting goals that were initially set too low or too Resetting goals that were initially set too low or too

high.high.

Controlling for Controlling for Organizational PerformanceOrganizational 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 activities.organization’s work processes and activities. Designing strategies, work processes, and work Designing strategies, work processes, and work

activities.activities. Coordinating the work of employeesCoordinating the work of employees

Organizational Performance Organizational Performance Measures Measures

Organizational ProductivityOrganizational Productivity Productivity:Productivity: the overall output of the overall output of

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

expense, and facilities)expense, and facilities) Ultimately, a measure of how efficiently Ultimately, a measure of how efficiently

employees do their work.employees do their work.

Organizational Performance Organizational Performance Measures Measures

Organizational EffectivenessOrganizational Effectiveness Measuring how appropriate organizational Measuring how appropriate organizational

goals are and how well the organization is goals are and how well the organization is achieving its goals.achieving its goals. Systems resource modelSystems resource model

The ability of the organization to exploit its The ability of the organization to exploit its environment in acquiring scarce and valued resourcesenvironment in acquiring scarce and valued resources

The process modelThe process model The efficiency of an organization’s transformation The efficiency of an organization’s transformation

process in converting inputs to outputsprocess in converting inputs to outputs The multiple constituencies modelThe multiple constituencies model

The effectiveness of the organization in meeting each The effectiveness of the organization in meeting each constituencies’ needsconstituencies’ needs

Organizational Effectiveness Organizational Effectiveness MeasuresMeasures

Industry rankings on:Industry rankings on: ProfitsProfits Return on revenueReturn on revenue Return on Return on

shareholders’ equityshareholders’ equity Growth in profitsGrowth in profits Revenues per Revenues per

employeeemployee Revenues per dollar of Revenues per dollar of

assetsassets Revenues per dollar of Revenues per dollar of

equityequity

Corporate Culture Corporate Culture AuditsAudits

Compensation Compensation and benefits and benefits surveyssurveys

Customer Customer satisfactionsatisfactionsurveyssurveys

Tools for Controlling Tools for Controlling Organizational PerformanceOrganizational Performance

Feedforward ControlFeedforward Control A control that prevents anticipated problems A control that prevents anticipated problems

before actual occurrences of the problem.before actual occurrences of the problem. Building in quality through designBuilding in quality through design Requiring suppliers conform to ISO 9002Requiring suppliers conform to ISO 9002

Concurrent ControlConcurrent Control A control that takes place while the monitored A control that takes place while the monitored

activity is in progress.activity is in progress. Direct supervision: management by walking around.Direct supervision: management by walking around.

Tools for Controlling Tools for Controlling Organizational Performance Organizational Performance

(cont’d)(cont’d) Feedback ControlFeedback Control

A control that takes place after an activity is A control that takes place after an activity is done.done. Corrective action is after-the-fact, when the problem Corrective action is after-the-fact, when the problem

has already occurred.has already occurred. Advantages of feedback controlsAdvantages of feedback controls

Feedback provides managers with information on the Feedback provides managers with information on the effectiveness of their planning efforts.effectiveness of their planning efforts.

Feedback enhances employee motivation by providing Feedback enhances employee motivation by providing them with information on how well they are doing.them with information on how well they are doing.

Tools for Controlling Tools for Controlling Organizational Performance: Organizational Performance:

Financial ControlsFinancial Controls Traditional Traditional ControlsControls Ratio analysisRatio analysis

LiquidityLiquidity LeverageLeverage ActivityActivity ProfitabilityProfitability

Budget AnalysisBudget Analysis Quantitative Quantitative

standardsstandards DeviationsDeviations

Other MeasuresOther Measures Economic Value Economic Value

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

Added (MVA)Added (MVA)

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

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

How much value is created by what a How much value is created by what a company does with its assets, less any capital company does with its assets, less any capital investments in those assets: investments in those assets: the rate of the rate of return earned over and above the cost of return earned over and above the cost of capital.capital. The choice is to use less capital or invest in high-The choice is to use less capital or invest in high-

return projects.return projects.

Tools for Controlling Tools for Controlling Organizational Performance: Organizational Performance: Financial Controls (cont’d)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 The value that the stock market places on a firm’s past and expected capital investment firm’s past and expected capital investment projectsprojects

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

Controlling Organizational Controlling Organizational PerformancePerformance

Balanced ScorecardBalanced Scorecard A measurement tool that uses goals set A measurement tool that uses goals set

by managers in four areas to measure a by managers in four areas to measure a company’s performance:company’s performance: Financial, customer, internal processes, and Financial, customer, internal processes, and

people/innovation/growth assetspeople/innovation/growth assets

Information ControlsInformation Controls

Management Information Systems (MIS)Management Information Systems (MIS) A system used to provide management with A system used to provide management with

needed information on a regular basis.needed information on a regular basis. Data: an unorganized collection of raw, Data: an unorganized collection of raw,

unanalyzed facts (e.g., unsorted list of customer unanalyzed facts (e.g., unsorted list of customer names)names)

Information: data that has been analyzed and Information: data that has been analyzed and organized such that it has value and relevance to organized such that it has value and relevance to managersmanagers

Benchmarking of Best Benchmarking of Best PracticesPractices

BenchmarkingBenchmarking The search for the best practices among The search for the best practices among

competitors or noncompetitors that lead competitors or noncompetitors that lead to their superior performance.to their superior performance. Benchmark:Benchmark: the standard of excellence the standard of excellence

against which to measure and compare.against which to measure and compare. A control tool for identifying and A control tool for identifying and

measuring specific performance gaps measuring specific performance gaps and areas for improvement.and areas for improvement.

Contemporary Issues in Contemporary Issues in ControlControl

Cross-Cultural IssuesCross-Cultural Issues The use of technology to increase direct The use of technology to increase direct

corporate control of local operationscorporate control of local operations Legal constraints on corrective actions in Legal constraints on corrective actions in

foreign countriesforeign countries Difficulty with the comparability of data Difficulty with the comparability of data

collected from operations in different collected from operations in different countriescountries

Contemporary Issues in Contemporary Issues in Control (cont’d)Control (cont’d)

Workplace ConcernsWorkplace Concerns Workplace privacy versus workplace Workplace privacy versus workplace

monitoring:monitoring: E-mail, telephone, computer, and Internet usageE-mail, telephone, computer, and Internet usage Productivity, harassment, security, confidentiality, Productivity, harassment, security, confidentiality,

intellectual property protectionintellectual property protection Employee theftEmployee theft

The unauthorized taking of company property by The unauthorized taking of company property by employees for their personal use.employees for their personal use.

Workplace violenceWorkplace violence Anger, rage, and violence in the workplace is affecting Anger, rage, and violence in the workplace is affecting

employee productivity.employee productivity.

Contemporary Issues in Contemporary Issues in Control (cont’d)Control (cont’d)

Customer InteractionsCustomer Interactions Service profit chainService profit chain

The service sequence from employees to customers to The service sequence from employees to customers to profit: service capability affects service value which profit: service capability affects service value which impacts on customer satisfaction that, in turn, leads to impacts on customer satisfaction that, in turn, leads to customer loyalty in the form of repeat business (profit).customer loyalty in the form of repeat business (profit).

Corporate GovernanceCorporate Governance The system used to govern a corporation so that The system used to govern a corporation so that

the interests of the corporate owners are the interests of the corporate owners are protected.protected. Changes in the role of boards of directorsChanges in the role of boards of directors Increased scrutiny of financial reportingIncreased scrutiny of financial reporting