Chapter 11
Organizational Control
Organizational ControlMonitoring the efficiency and effectiveness of activities necessary for achieving org. goals.Anticipating future eventsResponding to opportunities & threatsEvaluating strategy & structureKeeping employees motivated
Control SystemsFormal feedback systems that provide information about org. performanceEffective control system:Provides an accurate picture of org. performanceProvides info. in a timely mannerIs flexible enough to allow managers to respond to unexpected eventsRevolutionized by IT
Three Types of Control
Feedforward ControlInput stageAnticipate problems before they occurExamples:Monitor changes in trendsCoordinate with suppliers
Concurrent ControlImmediate feedback about how efficiently inputs are being turned into outputsAllows for problems to be corrected as they ariseTotal Quality Management
Feedback ControlProvides information regarding customer’s reactionsExample:Number of customer returnsNumber of complaints
The Control ProcessStep 1: Establish Performance StandardsThousands to choose fromMust be consistent with company strategyOveremphasis on any one can have negative consequences
The Control ProcessStep 2: Measure Actual PerformanceMeasure outputs of behaviorsEasier to measureMore objectiveMeasure behaviors themselves Routine are easy to measureNon-routine are hard to measure
The Control ProcessStep 3: Compare actual performance against standards.Three possibilitiesHigher LowerSame as performance standard
The Control ProcessStep 4: Evaluate and take corrective actionIf performance was unacceptable:Changes in the way resources are used are neededTechnology, training, structure, motivation, etc.
Three Control Systems
Financial Measures of PerformanceProfit Ratios – How efficiently resources are used to generate profitsReturn on InvestmentNet Income Before Taxes / Total AssetsGross Profit Margin(Sales – COGS) / Sales
Liquidity Ratios – How easily short term obligations can be met.Current RatioCurrent assets / current liabilitiesQuick Ratio(Current assets – inventory) / current liabilities
Financial Measures of Performance
Leverage Ratios – how much debt vs. equity was used to buy org. resourcesDebt-to-Assets RatioDebt / AssetsTimes-covered RatioEBIT / Interest Expenses
Financial Measures of Performance
Asset Activity Ratios – How efficiently are org. resources being usedInventory TurnoverCOGS / InventoryDays Sales OutstandingAccounts Receivable / Average Daily Sales
Financial Measures of Performance
Organizational GoalsToo lowNot motivatingToo HighDiscouraging…not motivatingStretch GoalsAppropriately Challenging
Operating BudgetsPlan for how managers intend to used org. resources in order to create org. performanceResources are divided up and allocated down the hierarchyManagers are evaluated by their ability to meet budgetRevenue, cost control, profitability
Problems with Output ControlTendency to focus on short-termHi ...
1. Chapter 11
Organizational Control
Organizational ControlMonitoring the efficiency and
effectiveness of activities necessary for achieving org.
goals.Anticipating future eventsResponding to opportunities &
threatsEvaluating strategy & structureKeeping employees
motivated
Control SystemsFormal feedback systems that provide
information about org. performanceEffective control
system:Provides an accurate picture of org.
performanceProvides info. in a timely mannerIs flexible enough
to allow managers to respond to unexpected
eventsRevolutionized by IT
Three Types of Control
Feedforward ControlInput stageAnticipate problems before they
2. occurExamples:Monitor changes in trendsCoordinate with
suppliers
Concurrent ControlImmediate feedback about how efficiently
inputs are being turned into outputsAllows for problems to be
corrected as they ariseTotal Quality Management
Feedback ControlProvides information regarding customer’s
reactionsExample:Number of customer returnsNumber of
complaints
The Control ProcessStep 1: Establish Performance
StandardsThousands to choose fromMust be consistent with
company strategyOveremphasis on any one can have negative
consequences
The Control ProcessStep 2: Measure Actual
PerformanceMeasure outputs of behaviorsEasier to
measureMore objectiveMeasure behaviors themselves Routine
are easy to measureNon-routine are hard to measure
The Control ProcessStep 3: Compare actual performance against
standards.Three possibilitiesHigher LowerSame as performance
standard
3. The Control ProcessStep 4: Evaluate and take corrective
actionIf performance was unacceptable:Changes in the way
resources are used are neededTechnology, training, structure,
motivation, etc.
Three Control Systems
Financial Measures of PerformanceProfit Ratios – How
efficiently resources are used to generate profitsReturn on
InvestmentNet Income Before Taxes / Total AssetsGross Profit
Margin(Sales – COGS) / Sales
Liquidity Ratios – How easily short term obligations can be
met.Current RatioCurrent assets / current liabilitiesQuick
Ratio(Current assets – inventory) / current liabilities
Financial Measures of Performance
Leverage Ratios – how much debt vs. equity was used to buy
org. resourcesDebt-to-Assets RatioDebt / AssetsTimes-covered
RatioEBIT / Interest Expenses
Financial Measures of Performance
Asset Activity Ratios – How efficiently are org. resources being
usedInventory TurnoverCOGS / InventoryDays Sales
OutstandingAccounts Receivable / Average Daily Sales
Financial Measures of Performance
4. Organizational GoalsToo lowNot motivatingToo
HighDiscouraging…not motivatingStretch GoalsAppropriately
Challenging
Operating BudgetsPlan for how managers intend to used org.
resources in order to create org. performanceResources are
divided up and allocated down the hierarchyManagers are
evaluated by their ability to meet budgetRevenue, cost control,
profitability
Problems with Output ControlTendency to focus on short-
termHigh standards might promote unethical behavior
Behavior ControlDirect SupervisionManagement by Objectives
(MBO)Bureaucratic Control
Direct SupervisionManagers actively monitor
subordinatesTeach appropriate behaviorsIntervene when
corrective action is neededCan be effectiveProblems with Direct
SupervisionExpensiveCan decrease motivationNot
feasible/appropriate in all circumstances
Management by ObjectivesControl system based on
subordinate’s ability to meet goals & performance
objectivesSpecific goals are set at each level of the firm.Goal
5. setting is participatory Periodic reviews of subordinates’
progress toward goals are held pay raises and promotions are
tied to goal attainment
Bureaucratic ControlControl by a system of rules & SOPs.Tells
workers what to do (standardized actions) so outcomes are
predictable.There is still a need for output control to correct
mistakes.Best used for routine problems in stable environments.
Problems with Bureaucratic ControlEasy to have too many
rulesToo much “red tape”People will blindly follow rulesToo
standardizedNo ability to learnNo ability to innovate
Organizational CultureA shared set of values, beliefs, &
assumptionsEmployees internalize organizational valuesCreates
an internalized control systemEliminates the need for externally
imposed controlsWorks in situations where behavior & output
control don’tCan be created to focus on long-term performance
Organizational ChangeFundamental tension between 2 control
forces:To standardize & make performance predictableTo be
responsive to changes / flexibleBecause environments are
dynamic,The highest performing companies are those that are
able to constantly changeFour step process
Assessing the Need for ChangeRecognizing that there is a
