Nature of Control in Organizations The Purpose of Control Types of Control Steps in Control Operations Control Preliminary Control Screening Control Postaction Control Financial Control Budgetary Control Other Tools of Financial Control Structural Control Bureaucratic Control Clan Control Strategic Control Integrating Strategy and Control International Strategic Control Managing Control in Organizations Characteristics of Effective Control Resistance to Control Overcoming Resistance to Control

1. • Nature of Control inNature of Control in
OrganizationsOrganizations
– The Purpose of ControlThe Purpose of Control
– Types of ControlTypes of Control
– Steps in ControlSteps in Control
• Operations ControlOperations Control
– Preliminary ControlPreliminary Control
– Screening ControlScreening Control
– Postaction ControlPostaction Control
• Financial ControlFinancial Control
– Budgetary ControlBudgetary Control
– Other Tools of FinancialOther Tools of Financial
ControlControl
• Structural ControlStructural Control
– Bureaucratic ControlBureaucratic Control
– Clan ControlClan Control
• Strategic ControlStrategic Control
– Integrating Strategy andIntegrating Strategy and
ControlControl
– International Strategic ControlInternational Strategic Control
• Managing Control inManaging Control in
OrganizationsOrganizations
– Characteristics of EffectiveCharacteristics of Effective
ControlControl
– Resistance to ControlResistance to Control
– Overcoming Resistance toOvercoming Resistance to
ControlControl
Basic Elements of ControlBasic Elements of Control

2. Nature of Control in OrganizationsNature of Control in Organizations
ControlControl
– The regulation of organizational activitiesThe regulation of organizational activities
so that some targeted element ofso that some targeted element of
performance remains within acceptableperformance remains within acceptable
limits.limits.
– Provides organizations with indications ofProvides organizations with indications of
how well they are performing in relation tohow well they are performing in relation to
their goals.their goals.
– Control provides a mechanism for adjustingControl provides a mechanism for adjusting
performance to keep organizations movingperformance to keep organizations moving
in the right direction.in the right direction.

3. The Nature of Control inThe Nature of Control in
Organizations (cont’d)Organizations (cont’d)
• The Purpose of ControlThe Purpose of Control
– Control is one of the four basic management functions. TheControl is one of the four basic management functions. The
control function, in turn, has four basic purposes.control function, in turn, has four basic purposes.
Adapt to environmental change Limit the accumulation of error
Control helps the organization
Cope with organizational complexity Minimize costs

4. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
• Types of ControlsTypes of Controls
– Areas of ControlAreas of Control
• Physical resourcesPhysical resources—inventory management, quality—inventory management, quality
control, and equipment control.control, and equipment control.
• Human resourcesHuman resources—selection and placement, training—selection and placement, training
and development, performance appraisal, andand development, performance appraisal, and
compensation.compensation.
• Information resourcesInformation resources—sales and marketing forecasts,—sales and marketing forecasts,
environmental analysis, public relations, productionenvironmental analysis, public relations, production
scheduling, and economic forecasting.scheduling, and economic forecasting.
• Financial resourcesFinancial resources—managing capital funds and cash—managing capital funds and cash
flow, collection and payment of debts.flow, collection and payment of debts.

5. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
• Types of Controls (cont’d)
– Levels of Control
Strategic
control
Structural
control
Operations
control
Financial
control

6. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
•Types of Controls (cont’d)Types of Controls (cont’d)
– Responsibilities for ControlResponsibilities for Control
•ControllerController—a position in organizations—a position in organizations
that helps line managers withthat helps line managers with
their control activities.their control activities.

7. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
• Steps in the Control Process
Establish
standards
Measure
performance
Compare
performance
against standards
Maintain the
status quo
Correct the
deviation
Change
standards
Determine need
for corrective
action
21 43

8. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
• Steps in the Control Process (cont’d)Steps in the Control Process (cont’d)
– Establish StandardsEstablish Standards
• Control standardControl standard——a target against which subsequenta target against which subsequent
performance will be compared.performance will be compared.
– Control standards should be expressed in measurable terms.Control standards should be expressed in measurable terms.
– Control standards should be consistent with organizationalControl standards should be consistent with organizational
goals.goals.
– Control standards should be identifiable indicators ofControl standards should be identifiable indicators of
performance.performance.
– Measure PerformanceMeasure Performance
• Performance measurement is a constant, ongoing process.Performance measurement is a constant, ongoing process.
• Performance measures must be valid indicators (e.g., sales, costs,Performance measures must be valid indicators (e.g., sales, costs,
units produced) of performance.units produced) of performance.

9. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
• Steps in the Control Process (cont’d)Steps in the Control Process (cont’d)
– Compare Performance Against StandardsCompare Performance Against Standards
• Define what is a permissible deviation from theDefine what is a permissible deviation from the
performance standard.performance standard.
• Utilize the appropriate timetable for measurement.Utilize the appropriate timetable for measurement.
– Determine the Need for Corrective ActionDetermine the Need for Corrective Action
• Maintain the status quo (do nothing).Maintain the status quo (do nothing).
• Correct the deviation to bring operations intoCorrect the deviation to bring operations into
compliance with the standard.compliance with the standard.
• Change the standard if it was set too high or too low.Change the standard if it was set too high or too low.

10. Nature of Control inNature of Control in
Organizations (cont’d)Organizations (cont’d)
• Operations Control
Preliminary control
Focus is on inputs
to the organizational
system
Inputs Transformation Outputs
Screening control
Focus is on how
inputs are being
transformed into
outputs
Postaction control
Focus is on outputs
from the organiza-
tional system
Feedback

11. Financial ControlFinancial Control
Financial ControlFinancial Control
– Control of financial resources (i.e.,Control of financial resources (i.e.,
revenues, shareholder investment) as theyrevenues, shareholder investment) as they
flow into the organization, are held by theflow into the organization, are held by the
organization (i.e., working capital, retainedorganization (i.e., working capital, retained
earnings), and flow out of the organizationearnings), and flow out of the organization
(i.e., payment of expenses).(i.e., payment of expenses).

12. Financial Control (cont’d)Financial Control (cont’d)
• Financial ControlFinancial Control
– Budgetary ControlBudgetary Control
• Budgets may be established at any organizational level.Budgets may be established at any organizational level.
• Budgets are typically for one year or less.Budgets are typically for one year or less.
• Budgets may be expressed in financial terms, units of output, orBudgets may be expressed in financial terms, units of output, or
other quantifiable factors.other quantifiable factors.
• Budgets serve four purposes:Budgets serve four purposes:
– Help managers coordinate resources and projects.Help managers coordinate resources and projects.
– Help define the established standards for control.Help define the established standards for control.
– Provide guidelines about the organization’s resources andProvide guidelines about the organization’s resources and
expectations.expectations.
– Enable the organization to evaluate the performance ofEnable the organization to evaluate the performance of
managers and organizational units.managers and organizational units.

13. Financial Control (cont’d)Financial Control (cont’d)
• Types of BudgetsTypes of Budgets
Type of Budget What Budget Shows
Financial budget Sources and uses of cash
Cash-flow or cash budget All sources of cash income and cash
expenditures in monthly, weekly, or daily
periods
Capital-expenditures budget Costs of major assets such as a new plant,
machinery, or land
Balance-sheet budget Forecast of the organization’s assets and
liabilities in the event that all other budgets
are met

14. Financial Control (cont’d)Financial Control (cont’d)
• Types of Budgets (cont’d)
Type of Budget What Budget Shows
Operating budget Planned operations in financial terms
Sales or revenue budget Income the organization expects to receive from
normal operations
Expense budget Anticipated expenses for the organization during
the coming time period
Profit budget Anticipated differences between sales or revenues
and expenses

15. Financial Control (cont’d)Financial Control (cont’d)
• Types of Budgets (cont’d)
Type of Budget What Budget Shows
Nonmonetary budget Planned operations in nonfinancial terms
Labor budget Hours of direct labor available for use
Space budget Square feet or meters of space available for
various functions
Production budget Number of units to be produced during the coming
time period

16. FinancialFinancial
ControlControl
(cont’d)(cont’d)
• Developing
Budgets in
Organizations
Operating unit
budget requests
Division budget
requests
Organizational budget
• Prepared by budget
committee
• Approved by budget
committee, controller,
and CEO

17. Financial Control (cont’d)Financial Control (cont’d)
StrengthsStrengths
–Budgets facilitate effectiveBudgets facilitate effective
operational controls.operational controls.
–Budgets facilitateBudgets facilitate
coordination andcoordination and
communication betweencommunication between
departments.departments.
–Budgets establish records ofBudgets establish records of
organizational performance,organizational performance,
which can enhance planning.which can enhance planning.
WeaknessesWeaknesses
– Budgets can hamperBudgets can hamper
operations if applied toooperations if applied too
rigidly.rigidly.
– Budgets can be timeBudgets can be time
consuming to develop.consuming to develop.
– Budgets can limit innovationBudgets can limit innovation
and change.and change.
Strengths and Weaknesses ofStrengths and Weaknesses of
BudgetingBudgeting

18. Other Tools of Financial ControlOther Tools of Financial Control
• Financial StatementsFinancial Statements
– Financial statement is a profile of some aspect of anFinancial statement is a profile of some aspect of an
organization’s financial circumstances.organization’s financial circumstances.
– Balance sheetBalance sheet
• A lA listing of assets (current and fixed), liabilities (short- and long-isting of assets (current and fixed), liabilities (short- and long-
term), and stockholders’ equity at a specific point in timeterm), and stockholders’ equity at a specific point in time
(typically, year-ending) that summarizes the financial condition(typically, year-ending) that summarizes the financial condition
of the organization.of the organization.
– Income statementIncome statement
• Summary of financial performanceSummary of financial performance——revenues less expenses asrevenues less expenses as
net income (i.e., profit or loss)net income (i.e., profit or loss)——over a period of time, usually oneover a period of time, usually one
year.year.

19. Other Tools of Financial ControlOther Tools of Financial Control
(cont’d)(cont’d)
• Ratio AnalysisRatio Analysis
– The calculation of of one or more financial ratios to assessThe calculation of of one or more financial ratios to assess
some aspect of the organization’s financial health.some aspect of the organization’s financial health.
• Financial AuditsFinancial Audits
– AuditAudit—an independent appraisal of an organization’s—an independent appraisal of an organization’s
accounting, financial, and operational systems.accounting, financial, and operational systems.
• External auditsExternal audits—financial appraisals conducted by experts who—financial appraisals conducted by experts who
are not employees of the organization to verify to external partiesare not employees of the organization to verify to external parties
that the organization’s financial and accounting procedures arethat the organization’s financial and accounting procedures are
legal and proper.legal and proper.
• Internal auditsInternal audits—appraisals conducted by employees of the—appraisals conducted by employees of the
organization to determine the accuracy, efficiency, andorganization to determine the accuracy, efficiency, and
appropriateness of financial and accounting procedures.appropriateness of financial and accounting procedures.

20. Structural ControlStructural Control
• Bureaucratic ControlBureaucratic Control
– A form of organizational control characterized by formal andA form of organizational control characterized by formal and
mechanistic structural arrangements.mechanistic structural arrangements.
• Clan ControlClan Control
– An approach to organizationalAn approach to organizational
control characterized bycontrol characterized by
informal and organicinformal and organic
structural arrangements.structural arrangements.

21. Structural Control (cont’d)Structural Control (cont’d)
• Organizational Control
Dimension
Employee compliance
Goal of control approach
Strict rules, formal controls,
rigid hierarchy
Directed toward minimum
levels of acceptable
performance
Tall structure, top-down
influence
Directed at individual
performance
Limited and formal
Employee commitment
Group norms, culture,
self-control
Directed toward enhanced
performance above and
beyond the minimum
Flat structure, shared
influence
Directed at group
performance
Extended and informal
Performance expectations
Degree of formality
Organization design
Reward system
Participation
Bureaucratic Control Clan Control

22. Strategic ControlStrategic Control
• Integrating Strategy and ControlIntegrating Strategy and Control
– Strategic controlStrategic control
• Control aimed at ensuring that the organization is maintaining anControl aimed at ensuring that the organization is maintaining an
effective alignment with its environment and moving towardeffective alignment with its environment and moving toward
achieving its strategic plan.achieving its strategic plan.
• Focuses on structure, leadership, technology, human resources,Focuses on structure, leadership, technology, human resources,
and informational and operational systems.and informational and operational systems.
• Focuses on the extent to which implemented strategy achieves theFocuses on the extent to which implemented strategy achieves the
organization’s goals.organization’s goals.
– International Strategic ControlInternational Strategic Control
• Focuses on whether to manage the global organization from aFocuses on whether to manage the global organization from a
centralized or decentralized perspective.centralized or decentralized perspective.
– Centralization creates more control and coordination, whereasCentralization creates more control and coordination, whereas
decentralization fosters adaptability and innovation.decentralization fosters adaptability and innovation.

23. Managing Control in OrganizationsManaging Control in Organizations
• Characteristics of Effective ControlCharacteristics of Effective Control
– Integration with PlanningIntegration with Planning
• The more explicitly and precisely control is linked to planning,The more explicitly and precisely control is linked to planning,
the more effective the control system.the more effective the control system.
– FlexibilityFlexibility
• The control system must be flexible enough to accommodateThe control system must be flexible enough to accommodate
change.change.
– AccuracyAccuracy
• Inaccurate information results in bad decision making andInaccurate information results in bad decision making and
inappropriate managerial actions.inappropriate managerial actions.
– TimelinessTimeliness
• A control system should provide information as often asA control system should provide information as often as
necessary.necessary.
– ObjectivityObjectivity
• A control system must be free from bias and distortion.A control system must be free from bias and distortion.

24. Managing Control inManaging Control in
Organizations (cont’d)Organizations (cont’d)
• Resistance to ControlResistance to Control
– OvercontrolOvercontrol
• Trying to control too many details becomes problematic whenTrying to control too many details becomes problematic when
control affects employee behavior and employees perceive controlcontrol affects employee behavior and employees perceive control
attempts as unreasonable.attempts as unreasonable.
– Inappropriate FocusInappropriate Focus
• The control system may be too narrow or it may focus too muchThe control system may be too narrow or it may focus too much
on quantifiable variables and leave no room for analysis oron quantifiable variables and leave no room for analysis or
interpretation.interpretation.
– Rewards for InefficiencyRewards for Inefficiency
• Rewarding operational efficiency can lead employees to behave inRewarding operational efficiency can lead employees to behave in
ways that are not in the best interests of the organization.ways that are not in the best interests of the organization.
– Too much accountabilityToo much accountability
• Efficient controls are resisted by poorly performing employees.Efficient controls are resisted by poorly performing employees.

25. Overcoming Resistance to ControlOvercoming Resistance to Control
• Resistance to control can be overcome by:Resistance to control can be overcome by:
– Designing effective controls that are properly integrated withDesigning effective controls that are properly integrated with
organizational planning and aligned with organizational goalsorganizational planning and aligned with organizational goals
and standards.and standards.
– Creating controls that are flexible, accurate, timely, andCreating controls that are flexible, accurate, timely, and
objective.objective.
– Avoiding overcontrol in the implementation of controls.Avoiding overcontrol in the implementation of controls.
– Guarding against creating controls that reward inefficiencies.Guarding against creating controls that reward inefficiencies.
– Encouraging employee participation in the planning andEncouraging employee participation in the planning and
implementing of control systems.implementing of control systems.
– Developing a system of checks and balances in the controlDeveloping a system of checks and balances in the control
systems through the use of multiple standards andsystems through the use of multiple standards and
information systems that allow the organization to verify theinformation systems that allow the organization to verify the
accuracy of performance indicators.accuracy of performance indicators.