Foundations of Control Chapter 18 Summary

ninth edition
STEPHEN P. ROBBINS
© 2007 Prentice Hall, Inc.© 2007 Prentice Hall, Inc.
All rights reserved.All rights reserved.
PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie Cook
The University of West AlabamaThe University of West Alabama
MARY COULTER
FoundationsFoundations
of Controlof Control
ChapterChapter
1818

© 2007 Prentice Hall, Inc. All rights
reserved. 18–2
L E A R N I N G O U T L I N EL E A R N I N G O U T L I N E
Follow this Learning Outline as you read and study this chapter.Follow this Learning Outline as you read and study this chapter.
What Is Control and Why Is It Important?What Is Control and Why Is It Important?
• Define control.Define control.
• Contrast the three approaches to designing controlContrast the three approaches to designing control
systems.systems.
• Discuss the reasons why control is important.Discuss the reasons why control is important.
• Explain the planning-controlling link.Explain the planning-controlling link.
The Control ProcessThe Control Process
• Describe the three steps in the control process.Describe the three steps in the control process.
• Explain why what is measured is more critical than howExplain why what is measured is more critical than how
it’s measured.it’s measured.
• Explain the three courses of action managers can take inExplain the three courses of action managers can take in
controlling.controlling.

reserved. 18–3
L E A R N I N G O U T L I N E (cont’d)L E A R N I N G O U T L I N E (cont’d)
Controlling Organizational PerformanceControlling Organizational Performance
• Define organizational performance.Define organizational performance.
• Describe the most frequently used measures ofDescribe the most frequently used measures of
organizational performance.organizational performance.
Tools for Organizational PerformanceTools for Organizational Performance
• Contrast feedforward, concurrent, and feedback controls.Contrast feedforward, concurrent, and feedback controls.
• Explain the types of financial and information controlsExplain the types of financial and information controls
managers can use.managers can use.
• Describe how balanced scorecards and benchmarking areDescribe how balanced scorecards and benchmarking are
used in controlling.used in controlling.

reserved. 18–4
L E A R N I N G O U T L I N E (cont’d)L E A R N I N G O U T L I N E (cont’d)
Contemporary Issues in ControlContemporary Issues in Control
• Describe how managers may have to adjust controls forDescribe how managers may have to adjust controls for
cross-cultural differences.cross-cultural differences.
• Discuss the types of workplace concerns managers faceDiscuss the types of workplace concerns managers face
and how they can address those concerns.and how they can address those concerns.
• Explain why control is important to customer interactions.Explain why control is important to customer interactions.
• Discuss what corporate governance is and how it’sDiscuss what corporate governance is and how it’s
changing.changing.

reserved. 18–5
What Is Control?What Is Control?
• ControllingControlling
 The process of monitoring activities to ensure thatThe process of monitoring activities to ensure that
they are being accomplished as planned and ofthey are being accomplished as planned and of
correcting any significant deviations.correcting any significant deviations.
• The Purpose of ControlThe Purpose of Control
 To ensure that activities are completed in ways thatTo ensure that activities are completed in ways that
lead to accomplishment of organizational goals.lead to accomplishment of organizational goals.

reserved. 18–6
Designing Control SystemsDesigning Control Systems
• Market ControlMarket Control
 Emphasizes the use of external market mechanismsEmphasizes the use of external market mechanisms
to establish the standards used in the control system.to establish the standards used in the control system.
 External measures:External measures: price competition and relativeprice competition and relative
market sharemarket share
• Bureaucratic ControlBureaucratic Control
 Emphasizes organizational authority and relies onEmphasizes 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.

reserved. 18–7
Exhibit 18–1Exhibit 18–1 Characteristics of Three Approaches to Control SystemsCharacteristics of Three Approaches to Control Systems
Type of ControlType of Control CharacteristicsCharacteristics
MarketMarket Uses external market mechanisms, such as price competitionUses external market mechanisms, such as price competition
and relative market share, to establish standards used inand relative market share, to establish standards used in
system. Typically used by organizations whose products orsystem. Typically used by organizations whose products or
services are clearly specified and distinct and that faceservices are clearly specified and distinct and that face
considerable marketplace competition.considerable marketplace competition.
BureaucraticBureaucratic Emphasizes organizational authority. Relies on administrativeEmphasizes organizational authority. Relies on administrative
and hierarchical mechanisms, such as rules, regulations,and hierarchical mechanisms, such as rules, regulations,
procedures, policies, standardization of activities, well-procedures, policies, standardization of activities, well-
defined job descriptions, and budgets to ensure thatdefined job descriptions, and budgets to ensure that
employees exhibit appropriate behaviors and meetemployees exhibit appropriate behaviors and meet
performance standards.performance standards.
ClanClan Regulates employee behavior by the shared values, norms,Regulates employee behavior by the shared values, norms,
traditions, rituals, beliefs, and other aspects of thetraditions, rituals, beliefs, and other aspects of the
organization’s culture. Often used by organizations in whichorganization’s culture. Often used by organizations in which
teams are common and technology is changing rapidly.teams are common and technology is changing rapidly.

reserved. 18–8
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 goalsControls let managers know whether their goals
and plans are on target and what future actions toand plans are on target and what future actions to
take.take.
 Empowering employeesEmpowering employees
 Control systems provide managers with informationControl 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 helpControls enhance physical security and help
minimize workplace disruptions.minimize workplace disruptions.

reserved. 18–9
Exhibit 18–2Exhibit 18–2 The Planning–Controlling LinkThe Planning–Controlling Link

reserved. 18–10
The Control ProcessThe Control Process
• The Process of ControlThe Process of Control
1.1. Measuring actualMeasuring actual
performance.performance.
2.2. Comparing actualComparing actual
performance against aperformance against a
standard.standard.
3.3. Taking action to correctTaking action to correct
deviations or inadequatedeviations or inadequate
standards.standards.

reserved. 18–11
Exhibit 18–3Exhibit 18–3 The Control ProcessThe Control Process

reserved. 18–12
Measuring: How and What We MeasureMeasuring: How and What We Measure
• Sources ofSources of
Information (How)Information (How)
 Personal observationPersonal observation
 Statistical reportsStatistical reports
 Oral reportsOral reports
 Written reportsWritten reports
• Control CriteriaControl Criteria
(What)(What)
 EmployeesEmployees
 SatisfactionSatisfaction
 TurnoverTurnover
 AbsenteeismAbsenteeism
 BudgetsBudgets
 CostsCosts
 OutputOutput
 SalesSales

reserved. 18–13
Exhibit 18–4Exhibit 18–4 Common Sources of InformationCommon Sources of Information
for Measuring Performancefor Measuring Performance

reserved. 18–14
ComparingComparing
• Determining the degree of variation betweenDetermining the degree of variation between
actual performance and the standard.actual performance and the standard.
 Significance of variation is determined by:Significance of variation is determined by:
 The acceptable range of variation from theThe acceptable range of variation from the
standard (forecast or budget).standard (forecast or budget).
 The size (large or small) and direction (over orThe size (large or small) and direction (over or
under) of the variation from the standard (forecastunder) of the variation from the standard (forecast
or budget).or budget).

reserved. 18–15
Exhibit 18–5Exhibit 18–5 Defining the Acceptable Range of VariationDefining the Acceptable Range of Variation

reserved. 18–16
Exhibit 18–6Exhibit 18–6 Sales Performance Figures for July,Sales Performance Figures for July,
Eastern States DistributorsEastern States Distributors

reserved. 18–17
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 problemImmediate corrective action to correct the problem
at once.at once.
 Basic corrective action to locate and to correct theBasic corrective action to locate and to correct the
source of the deviation.source of the deviation.
 Corrective ActionsCorrective Actions
– Change strategy, structure, compensation scheme, orChange strategy, structure, compensation scheme, or
training programs; redesign jobs; or fire employeestraining programs; redesign jobs; or fire employees

reserved. 18–18
Taking Managerial Action (cont’d)Taking Managerial Action (cont’d)
• Courses of Action (cont’d)Courses of Action (cont’d)
 Revising the standardRevising the standard
 Examining the standard to ascertain whether or notExamining the standard to ascertain whether or not
the standard is realistic, fair, and achievable.the standard is realistic, fair, and achievable.
– Upholding the validity of the standard.Upholding the validity of the standard.
– Resetting goals that were initially set too low or too high.Resetting goals that were initially set too low or too high.

reserved. 18–19
Exhibit 18–7Exhibit 18–7 Managerial Decisions in the Control ProcessManagerial Decisions in the Control Process

reserved. 18–20
Controlling for OrganizationalControlling for Organizational
PerformancePerformance
• What Is Performance?What Is Performance?
 The end result of an activityThe end result of an activity
• What Is OrganizationalWhat Is Organizational
Performance?Performance?
 The accumulated end results of all of theThe accumulated end results of all of the
organization’s work processes and activitiesorganization’s work processes and activities
 Designing strategies, work processes, and workDesigning strategies, work processes, and work
activities.activities.
 Coordinating the work of employees.Coordinating the work of employees.

reserved. 18–21
Organizational Performance MeasuresOrganizational Performance Measures
• Organizational ProductivityOrganizational Productivity
 Productivity:Productivity: the overall output of goods and/orthe overall output of goods and/or
services divided by the inputs needed to generateservices divided by the inputs needed to generate
that output.that output.
 Output: sales revenuesOutput: sales revenues
 Inputs: costs of resources (materials, laborInputs: costs of resources (materials, labor
expense, and facilities)expense, and facilities)
 Ultimately, productivity is a measure of how efficientlyUltimately, productivity is a measure of how efficiently
employees do their work.employees do their work.

reserved. 18–22
Organizational Performance MeasuresOrganizational Performance Measures
• Organizational EffectivenessOrganizational Effectiveness
 Measuring how appropriate organizational goals areMeasuring 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 inThe 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 processThe efficiency of an organization’s transformation process
in converting inputs to outputs.in converting inputs to outputs.
 The multiple constituencies modelThe multiple constituencies model
– The effectiveness of the organization in meeting eachThe effectiveness of the organization in meeting each
constituencies’ needs.constituencies’ needs.

reserved. 18–23
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 ofRevenues per dollar of
assetsassets
 Revenues per dollar ofRevenues per dollar of
equityequity
• Corporate CultureCorporate Culture
AuditsAudits
• Compensation andCompensation and
benefits surveysbenefits surveys
• Customer satisfactionCustomer satisfaction
surveyssurveys

reserved. 18–24
Exhibit 18–8Exhibit 18–8 Popular Industry and Company RankingsPopular Industry and Company Rankings

reserved. 18–25
Tools for Controlling OrganizationalTools for Controlling Organizational
PerformancePerformance
• Feedforward ControlFeedforward Control
 A control that prevents anticipated problemsA control that prevents anticipated problems beforebefore
actual occurrences of the problem.actual occurrences of the problem.
 Building in quality through design.Building in quality through design.
 Requiring suppliers conform to ISO 9002.Requiring suppliers conform to ISO 9002.
• Concurrent ControlConcurrent Control
 A control that takes place while the monitored activityA control that takes place while the monitored activity
is in progress.is in progress.
 Direct supervisionDirect supervision: management by walking: management by walking
around.around.

reserved. 18–26
Exhibit 18–9Exhibit 18–9 Types of ControlTypes of Control

reserved. 18–27
Performance (cont’d)Performance (cont’d)
• Feedback ControlFeedback Control
 A control that takes place after an activity is done.A control that takes place after an activity is done.
 Corrective action is after-the-fact, when theCorrective action is after-the-fact, when the
problem has already occurred.problem has already occurred.
 Advantages of feedback controls:Advantages of feedback controls:
 Provide managers with information on theProvide managers with information on the
effectiveness of their planning efforts.effectiveness of their planning efforts.
 Enhance employee motivation by providing themEnhance employee motivation by providing them
with information on how well they are doing.with information on how well they are doing.

reserved. 18–28
Performance: Financial ControlsPerformance: Financial Controls
• Traditional ControlsTraditional Controls
 Ratio analysisRatio analysis
 LiquidityLiquidity
 LeverageLeverage
 ActivityActivity
 ProfitabilityProfitability
 Budget AnalysisBudget Analysis
 Quantitative standardsQuantitative standards
 DeviationsDeviations
• Other MeasuresOther Measures
 Economic Value AddedEconomic Value Added
(EVA)(EVA)
 Market Value AddedMarket Value Added
(MVA)(MVA)

reserved. 18–29
Exhibit 18–10Exhibit 18–10 Popular Financial RatiosPopular Financial Ratios

reserved. 18–30
Exhibit 18–10Exhibit 18–10 Popular Financial Ratios (cont’d)Popular Financial Ratios (cont’d)

reserved. 18–31
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 companyHow much value is created by what a company
does with its assets, less any capital investments indoes with its assets, less any capital investments in
those assets:those assets: the rate of return earned over andthe rate of return earned over and
above the cost of capital.above the cost of capital.
– The choice is to use less capital or invest in high-returnThe choice is to use less capital or invest in high-return
projects.projects.

reserved. 18–32
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’sThe value that the stock market places on a firm’s
past and expected capital investment projectspast and expected capital investment projects
 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 equityexceeds the value of its invest capital (its equity
and retained earnings), then managers haveand retained earnings), then managers have
created wealth.created wealth.
• The Practice of Managing EarningsThe Practice of Managing Earnings

reserved. 18–33
Controlling Organizational PerformanceControlling Organizational Performance
• Balanced ScorecardBalanced Scorecard
 Is a measurement tool that uses goals set byIs a measurement tool that uses goals set by
managers in four areas to measure a company’smanagers 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 areIs intended to emphasize that all of these areas are
important to an organization’s success and that thereimportant to an organization’s success and that there
should be a balance among them.should be a balance among them.

reserved. 18–34
Information ControlsInformation Controls
• Purposes of Information ControlsPurposes of Information Controls
 As a tool to help managers control otherAs a tool to help managers control other
organizational activities.organizational activities.
 Managers need the right information at the rightManagers need the right information at the right
time and in the right amount.time and in the right amount.
 As an organizational area that managers need toAs an organizational area that managers need to
control.control.
 Managers must have comprehensive and secureManagers must have comprehensive and secure
controls in place to protect the organization’scontrols in place to protect the organization’s
important information.important information.

reserved. 18–35
Information ControlsInformation Controls
• Management Information Systems (MIS)Management Information Systems (MIS)
 A system used to provide management with neededA system used to provide management with needed
information on a regular basis.information on a regular basis.
 Data:Data: an unorganized collection of raw, unanalyzedan unorganized collection of raw, unanalyzed
facts (e.g., unsorted list of customer names).facts (e.g., unsorted list of customer names).
 Information:Information: data that has been analyzed anddata that has been analyzed and
organized such that it has value and relevance toorganized such that it has value and relevance to
managers.managers.

reserved. 18–36
Benchmarking of Best PracticesBenchmarking of Best Practices
• BenchmarkBenchmark
 The standard of excellence against which to measureThe standard of excellence against which to measure
and compare.and compare.
• BenchmarkingBenchmarking
 Is the search for the best practices amongIs the search for the best practices among
competitors or noncompetitors that lead to theircompetitors or noncompetitors that lead to their
superior performance.superior performance.
 Is a control tool for identifying and measuring specificIs a control tool for identifying and measuring specific
performance gaps and areas for improvement.performance gaps and areas for improvement.

reserved. 18–37
Exhibit 18–11Exhibit 18–11 Steps to Successfully Implement an InternalSteps to Successfully Implement an Internal
Benchmarking Best Practices ProgramBenchmarking Best Practices Program
1.1. Connect best practices to strategies and goals.Connect best practices to strategies and goals.
2.2. Identify best practices throughout the organization.Identify best practices throughout the organization.
3.3. Develop best practices reward and recognitionDevelop best practices reward and recognition
systems.systems.
4.4. Communicate best practices throughout theCommunicate best practices throughout the
organization.organization.
5.5. Create a best practices knowledge-sharing system.Create a best practices knowledge-sharing system.
6.6. Nurture best practices on an ongoing basis.Nurture best practices on an ongoing basis.

reserved. 18–38
Contemporary Issues in ControlContemporary Issues in Control
• Cross-Cultural IssuesCross-Cultural Issues
 The use of technology to increase direct corporateThe use of technology to increase direct corporate
control of local operationscontrol of local operations
 Legal constraints on corrective actions in foreignLegal constraints on corrective actions in foreign
countriescountries
 Difficulty with the comparability of data collected fromDifficulty with the comparability of data collected from
operations in different countriesoperations in different countries

reserved. 18–39
Contemporary Issues in Control (cont’d)Contemporary Issues in Control (cont’d)
• Workplace ConcernsWorkplace Concerns
 Workplace privacy versus workplace monitoring:Workplace privacy versus workplace 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 byThe 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 isAnger, rage, and violence in the workplace is
affecting employee productivity.affecting employee productivity.

reserved. 18–40
Exhibit 18–12Exhibit 18–12
Types of WorkplaceTypes of Workplace
Monitoring byMonitoring by
EmployersEmployers
Source: American Management
Association/ePolicy Institute Research, “2005
Electronic Monitoring & Surveillance Survey,”
American Management Association.

reserved. 18–41
Exhibit 18–13Exhibit 18–13 Control Measures for Employee Theft or FraudControl Measures for Employee Theft or Fraud
Sources: Based on A.H. Bell and D.M. Smith. “Protecting the
Company Against Theft and Fraud,” Workforce Online
(www.workforce.com) December 3, 2000; J.D. Hansen. “To Catch
a Thief,” Journal of Accountancy, March 2000, pp. 43–46; and J.
Greenberg, “The Cognitive Geometry of Employee Theft,” in
Dysfunctional Behavior in Organizations: Nonviolent and Deviant
Behavior, eds. S.B. Bacharach, A. O’Leary-Kelly, J.M. Collins, and
R.W. Griffin (Stamford, CT: JAI Press, 1998), pp. 147–93.

reserved. 18–42
Exhibit 18–14Exhibit 18–14 Workplace ViolenceWorkplace Violence
Witnessed yelling or other verbal abuse 42%
Yelled at co-workers themselves 29%
Cried over work-related issues 23%
Seen someone purposely damage
machines or furniture 14%
Seen physical violence in the workplace 10%
Struck a co-worker 2%
Source: Integra Realty Resources, October-November Survey of Adults
18 and Over, in “Desk Rage.” BusinessWeek, November 20, 2000, p. 12.

reserved. 18–43
Exhibit 18–15Exhibit 18–15 Control Measures for Deterring or ReducingControl Measures for Deterring or Reducing
Workplace ViolenceWorkplace Violence
Sources: Based on M. Gorkin, “Five Strategies and Structures for Reducing
Workplace Violence,” Workforce Online (www.workforce.com). December
3, 2000; “Investigating Workplace Violence: Where Do You Start?”
Workforce Online (www.forceforce.com), December 3, 2000; “Ten Tips
on Recognizing and Minimizing Violence,” Workforce Online
(www.workforce.com), December 3, 2000; and “Points to Cover in a
Workplace Violence Policy,” Workforce Online (www.workforce.com),
December 3, 2000.

reserved. 18–44
• Customer InteractionsCustomer Interactions
 Service profit chainService profit chain
 Is the service sequence from employees toIs the service sequence from employees to
customers to profit.customers to profit.
 Service capability affects service value which impactsService capability affects service value which impacts
on customer satisfaction that, in turn, leads toon customer satisfaction that, in turn, leads to
customer loyalty in the form of repeat businesscustomer loyalty in the form of repeat business
(profit).(profit).

reserved. 18–45
Exhibit 18–16Exhibit 18–16 The Service Profit ChainThe Service Profit Chain
Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “Putting the Service Profit Chain to Work,” by J. L. Heskett,
T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., and L. A. Schlesinger. March–April 1994: 166. Copyright (c) by the President and Fellows of Harvard
College. All rights reserved. See also J. L. Heskett, W. E. Sasser, and L. A. Schlesinger, The Service Profit Chain (New York: Free Press, 1997).

reserved. 18–46
• Corporate GovernanceCorporate Governance
 The system used to govern a corporation so that theThe system used to govern a corporation so that the
interests of the corporate owners are protected.interests of the corporate owners are protected.
 Changes in the role of boards of directorsChanges in the role of boards of directors
 Increased scrutiny of financial reporting (Sarbanes-Increased scrutiny of financial reporting (Sarbanes-
Oxley Act of 2002)Oxley Act of 2002)
– More disclosure and transparency of corporate financialMore disclosure and transparency of corporate financial
informationinformation
– Certification of financial results by senior managementCertification of financial results by senior management

reserved. 18–47
Terms to KnowTerms to Know
• controllingcontrolling
• market controlmarket control
• bureaucratic controlbureaucratic control
• clan controlclan control
• control processcontrol process
• range of variationrange of variation
• immediate correctiveimmediate corrective
actionaction
• basic corrective actionbasic corrective action
• performanceperformance
• organizationalorganizational
performanceperformance
• productivityproductivity
• organizationalorganizational
effectivenesseffectiveness
• feedforward controlfeedforward control
• concurrent controlconcurrent control
• management by walkingmanagement by walking
aroundaround
• feedback controlfeedback control
• economic value addedeconomic value added
(EVA)(EVA)
• market value addedmarket value added
(MVA)(MVA)

reserved. 18–48
Terms to Know (cont’d)Terms to Know (cont’d)
• management informationmanagement information
system (MIS)system (MIS)
• datadata
• informationinformation
• balanced scorecardbalanced scorecard
• benchmarkingbenchmarking
• employee theftemployee theft
• service profit chainservice profit chain
• corporate governancecorporate governance

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