Chapter 16 Control

Learning Objectives Discuss the effects of too much or too little control in an organization. Describe the four basic elements of the control process and the issues involved in each. After studying this chapter, you should be able to:

Discuss the effects of too much or too little control in an organization.

Describe the four basic elements of the control process and the issues involved in each.

Learning Objectives Differentiate between the different levels of control and compare their implications for managers. Explain the concept of standards and why they are so important in organizations. After studying this chapter, you should be able to:

Differentiate between the different levels of control and compare their implications for managers.

Explain the concept of standards and why they are so important in organizations.

Learning Objectives Compare bureaucratic and clan controls. Identify the important qualities required for information to be useful in the control process. After studying this chapter, you should be able to:

Compare bureaucratic and clan controls.

Identify the important qualities required for information to be useful in the control process.

Control Function in Management Control Regulation of activities and behaviors within organizations Adjustment or conformity to specifications or objectives Effective control depends heavily on other functions that precede it and feeds back to them Planning Organizing Leading

Control

Regulation of activities and behaviors within organizations

Adjustment or conformity to specifications or objectives

Effective control depends heavily on other functions that precede it and feeds back to them

Planning

Organizing

Leading

Control Function in Management Adapted from Exhibit 16.1: The Control Function in Management Ensures adjustment or conformity to specifications Regulates activities Regulates behavior Ensures adjustment or conformity to objectives Control

Control’s Feedback Loop Adapted from Exhibit 16.2: Control’s Feedback Loop Feedback Changes in Organizing Planning Control

Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Establish standards Specification starts at the top of the organization and involves every level of employee Standards are the targets of performance Involving employees in setting standards Commits the employees to achieving the standards Results in more appropriate standards Establish standards

Establish standards

Specification starts at the top of the organization and involves every level of employee

Standards are the targets of performance

Involving employees in setting standards

Commits the employees to achieving the standards

Results in more appropriate standards

Specificity of Standards and Performance Measurement Adapted from Exhibit 16.4: The Effect of Specificity of Standards on Performance Measurement Specificity of standards Level of confusion in performance measurement High Low Concrete Abstract

Establishing Standards Adapted from Exhibit 16.5: Issues in Establishing Standards How specific should they be? Who should set them? How difficult should they be to reach? Standards

Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Measure performance Obtain consensus about how to assess performance If performance involves multiple activities, measure must be comprehensive Measurement is costly and hence usefulness of the information must justify the costs Establish standards Measure performance

Measure performance

Obtain consensus about how to assess performance

If performance involves multiple activities, measure must be comprehensive

Measurement is costly and hence usefulness of the information must justify the costs

Measurement of Performance Adapted from Exhibit 16.6: Issues in the Measurement of Performance Can expensive, but noncritical, controls be eliminated? Are all necessary aspects of actions contributing to performance being measured? Is there consensus among those involved as to how performance will be measured? Can measurement criteria be quantified? Performance Measurement

Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Compare performance against standards Comparisons are affected b the kinds of measurements available Managers must interpret the patterns of comparisons (some negative/some positive) Comparisons often involve subjective and objective measures Establish standards Measure performance Compare performance against standards

Compare performance against standards

Comparisons are affected b the kinds of measurements available

Managers must interpret the patterns of comparisons (some negative/some positive)

Comparisons often involve subjective and objective measures

Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Evaluate results/take necessary corrective action Not all results require action Evaluate importance and magnitude of the deviation Determine what action to take if necessary Diagnosis skills of managers Level of expertise Evaluate the standards and the measures Employees performing better than “standard” should be recognized and rewarded Establish standards Measure performance Compare performance against standards Evaluate results and take any necessary corrective action

Evaluate results/take necessary corrective action

Not all results require action

Evaluate importance and magnitude of the deviation

Determine what action to take if necessary

Diagnosis skills of managers

Level of expertise

Evaluate the standards and the measures

Employees performing better than “standard” should be recognized and rewarded

Outcomes of Performance Measurement Adapted from Exhibit 16.7: Outcomes of Performance Measurement Actual performance better than expected performance + - Actual performance worse than expected performance Actual performance measured against standard for performance Gap Detected Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines) Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment)

Scope of Control Assess and regulate how the organization fits its external environment and meets its long-range objectives and goals Control becomes less efficient in uncertain or changing environments Strategic Control

Assess and regulate how the organization fits its external environment and meets its long-range objectives and goals

Control becomes less efficient in uncertain or changing environments

Types and Scope of Control Adapted from Exhibit 16.8: Types and Scope of Control Scope (Narrow) (Broad) Operational Controls Tactical Controls Strategic Controls

Centralization of Control and Environmental Stability Adapted from Exhibit 16.9: Degree of Centralization of Control in Relation to Environmental Stability Environmental stability Degree of centralization Decentralized Centralized Stable Turbulent

Approaches to Strategic Control Adapted from Exhibit 16.10: Approaches to Strategic Control Ability to specify and measure precise strategic objectives Environmental turbulence Easy Difficult High Low

Scope of Control Assess and regulate day-to-day functions of the organization and its major units in implementing its strategy Financial controls Budgetary controls Supervisory structure controls Human resource controls Contrasting approaches to using tactical controls Bureaucratic control Commitment, or clan, control Tactical Control

Assess and regulate day-to-day functions of the organization and its major units in implementing its strategy

Financial controls

Budgetary controls

Supervisory structure controls

Human resource controls

Contrasting approaches to using tactical controls

Bureaucratic control

Commitment, or clan, control

Strategic and Tactical Controls Adapted from Exhibit 16.11: Characteristics of Strategic and Tactical Controls Time Frame Objective Types of Comparisons Focus Tactical Controls Strategic Controls Limited Long, unspecific Controls relate to specific, functional areas Controls relate to organization as a whole Comparisons made within organization Comparisons made to other organization Implementation of strategy Determination of overall organizational strategy

Ratio Formula Company Company Financial Ratios Adapted from exhibit 16.12: Examples of Company Financial Ratios The GAP, Inc. 2001 in $ millions The Limited, Inc. 2001 in $ millions Profit Return on Investment 0.03 0.19 Liquidity Current Ratio 1.4 2.0 Liabilities Leverage Debt to Assets 0.33 0.42 Net Profit before taxes Total Assets 241 7,591 904 4,719 Current Assets Current Liabilities 3,044 2,056 2,682 1,319 Total Debts Total Assets 2,525 7,591 1,975 4,719

Ratio Formula Company

Ratio Formula Company Company Financial Ratios Adapted from exhibit 16.12: Examples of Company Financial Ratios The GAP, Inc. 2001 in $ millions The Limited, Inc. 2001 in $ millions Activity Inventory Turnover 8.3 9.7 Sales Inventory 13,847 1,677 9,363 966

Ratio Formula Company

Issue Questions Budgetary Control Adapted from exhibit 16.13: Issues in Budgetary Control Rolling budgets and revision Should the budget period be for 12 months followed by another 12-month budget a year later, or should a calendar quarter be added each time a new calendar quarter begins? Should the budget remain fixed for the budget period or should it be revised periodically during the period? Fixed or flexible budgets Should performance be evaluated against the original budget or against a budget that incorporates the actual activity level of the business? Bonuses based on budgets Should incentive compensation, if any, be based on actual versus budgeted performance, or on actual performance against some other standard?

Issue Questions

Issue Questions Budgetary Control Adapted from exhibit 16.13: Issues in Budgetary Control Evaluation criteria Should the budget used to evaluate performance include only those items over which the evaluated manager has control, or should it include all unit costs and revenues appropriate to the managerial unit? Tightness of the budget What degree of “stretch” should there be in the budget? Source: Adapted from N. C. Churchill, “Budget Choices: Planning vs. Control,” Harvard Business Review 62, no. 4 (1984), pp. 150–164, (p. 151).

Issue Questions

Control in the Human Resource Function Adapted from Exhibit 16.14: Opportunities for Control in the Human Resource Function Training Compensation Selection Human Resource Function Controls Appraisal and evaluation

Type of Social Control Informational Control Requirements a Approach Requirements Control in Bureaucracy and Clan Structures Adapted from exhibit 16.15: Control in Bureaucracy and Clan Structures Bureaucracy Norm of reciprocity Legitimate authority Adherence to rules and regulations Formal and impersonal Emphasis on detecting deviance Imposed on the individual Rules Clan Norm of reciprocity Legitimate authority Shared values, beliefs Stresses group consensus on goals and their measurement Mutual assistance in meeting performance standards Uses deviations as guidelines in diagnosing problems Control comes from the individuals or groups Traditions Source: Adapted from William G. Ouchi, “A Conceptual Framework for the Design or Organizational Control Mechanisms,” Management Science 25, no. 9 (1980), pp. 833–847 (p. 838). a Social requirements are the basic agreements between people that, at a minimum, are necessary for a form of control to be employed.

Type of Social Control Informational Control Requirements a Approach Requirements

Scope of Control Assess and regulate specific activities and methods used to produce goods and services Precontrol of operations Concurrent control of operations Postcontrol of operations Operational Control

Assess and regulate specific activities and methods used to produce goods and services

Precontrol of operations

Concurrent control of operations

Postcontrol of operations

Operational Controls Adapted from Exhibit 16.16: Operational Controls Concurrent Control Evaluates the conversion process as it occurs Provides immediate feedback, which impacts worker motivation Precontrol Controls the quality, quantity, and other characteristics of the inputs to the process Postcontrol Traditionally, quality control Many of these controls are being changed to pre- and concurrent controls

Concurrent

Control

Evaluates the conversion process as it occurs

Provides immediate feedback, which impacts worker motivation

Precontrol

Controls the quality, quantity, and other characteristics of the inputs to the process

Postcontrol

Traditionally, quality control

Many of these controls are being changed to pre- and concurrent controls

Control Effectiveness Focus of control Balanced scorecard Financial perspective Customer perspective Internal business perspective Innovation and learning perspective Amount of control

Focus of control

Balanced scorecard

Financial perspective

Customer perspective

Internal business perspective

Innovation and learning perspective

Amount of control

Control Effectiveness Quality of information Usefulness Accuracy Timeliness Objectivity Flexibility Favorable cost-benefit ratio Source of control

Quality of information

Usefulness

Accuracy

Timeliness

Objectivity

Flexibility

Favorable cost-benefit ratio

Source of control

Key Factor Concerns Effectiveness of Controls Adapted from exhibit 16.17: Key Factors in Determining the Effectiveness of Controls Focus of control What will be controlled? Where should controls be located in the organizational structure? Who is responsible for which controls? Amount of control Is there a balance between over- and undercontrol? Quality of information collected by the controls Is the information useful? Is the information accurate? Is the information timely? Is the information objective? Flexibility of controls Are the controls able to respond to varying conditions? Favorable cost-benefit ratio Is the information being gathered worth the cost of gathering it? Source of control Is control imposed by others? Is control decided by those who are affected?

Key Factor Concerns