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Chapter

Chapter

Managerial ControlManagerial Control

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McGraw-Hill/IrwinMcGraw-Hill/IrwinManagement, 7/eManagement, 7/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives After Studying Chapter 16, You will know:

Why companies develop control systems for employees

How to design a basic bureaucratic control system

The purposes for using budgets as a control device

How to interpret financial ratios and other financial controls

The procedures for implementing effective control systems

The different ways in which market control mechanisms are used by organizations

How clan control can be approached in an empowered organization

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Control

Control is essential for the attainment of any management objective Control is any process that directs the

activities of individuals toward the achievement of organizational goals

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Characteristics of Control

Managers can apply three broad strategies for achieving organizational control Bureaucratic control is the use of rules,

regulations, and formal authority to guide performance

Market Control involves the use of pricing mechanisms to regulate activities in organizations as though they were economic transactions

Clan control I based on the idea that employees may share the values, expectations, and goals of the organization and act in accordance with them

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Control Problems

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Bureaucratic Control Systems: The Control Cycle

A typical bureaucratic control system has four major steps Setting performance standards Measuring performance Comparing performance against the standard

and determining deviations Taking corrective action

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The Control Cycle

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Approaches to Bureaucratic Control

There are three approaches to bureaucratic control Feed forward Control takes place before

operations begin and includes policies, procedures, and rules designed to ensure that planned activities are carried out properly

Concurrent control takes place while plans are being carried out and includes directing, monitoring, and fine-tuning activities

Feedback control focuses on the use of information about results to correct deviations from the acceptable standard after they arise

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Management Audits

Management audits are an evaluation of the effectiveness and efficiency of various systems within an organization

Management audits may be External – this occurs when one organization

evaluates another organization Internal – these are a periodic assessment of

a company’s own planning, organizing, leading, and controlling processes

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Budgetary Controls

Budgetary control is the process of finding out what’s being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences

This is one of the most widely recognized and commonly used methods of managerial control

It is commonly called budgeting

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Budgetary Control

Budgetary control begins with an estimate of sales and expected income

One of the primary considerations is the length of the budget period

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Types of Budgets Sales budget - Usually data for the sales budget are

prepared by month, sales area, and product Production budget - The production budget

commonly is expressed in physical units Cost budget - The cost budget is used for areas of

the organization that incur expenses but no revenue, such as human resources and other support departments

Cash budget - The cash budget shows the anticipated receipts and expenditures, the amount of working capital available, the extent to which outside financing may be required, and the periods and amounts of cash available

Capital budget - The capital budget is used for the cost of fixed assets like plant and equipment

Master budget - The master budget includes all the major activities of the business

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Financial Controls

Two financial statements that help control overall organizational performance are: Balance sheet shows the financial picture of

a company at a given time Profit and loss statement is an itemized

financial statement of the income and expenses of a company’s operations

Financial ratios are also an effective approach for checking on the overall performance of the enterprise

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The Downside of Bureaucratic Control

A control system cannot be effective without consideration of how people will react to it

Three types of responses Rigid bureaucratic behavior occurs when control systems

prompt employees to stay out of trouble by following the rules rather than doing the right thing

Tactical behavior leads to ineffective behavior because employees try to beat the system

Resistance to control occurs because Control systems uncover mistakes, threaten job security

and status, and decrease autonomy Control systems can change expertise and power

structures Control systems can change the social structure of an

organization Control systems may be seen as an invasion of privacy

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Designing Effective Control Systems

Effective control systems maximize potential benefits and minimize dysfunctional behaviors

Five characteristics of effective control systems They are based on valid performance standards They communicate adequate information to

employees They are acceptable to employees They use multiple approaches They recognized the relationship between

empowerment and control

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Market Control

Market controls involve the use of economic forces – and the pricing mechanisms that accompany them – to regulate performance

System is based on the principle that as output from an individual, department, or business unit creates value to other people, a price can be negotiated for its exchange

Two effects of this occur Price becomes an indicator of the value of the product

or service Price competition has the effect of controlling

productivity and performance

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Market Controls

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Market Controls

At the corporate level market controls are used to regulate independent business units

At the business unit level market controls are used to regulate exchanges among departments and functions Transfer price is the price charged by one

unit for a product or service provided to another unit within the organization

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Market Controls

Market controls are used at the individual level to determine wage levels for the skills that employees possess

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Clan Control: The Role of Empowerment and Culture

Managers are discovering that control systems based solely on bureaucratic and market mechanisms are insufficient for directing today’s workforce because Employee’s jobs have changed The nature of management has changed The employment relationship has changed

Because of this empowerment has become a necessary aspect of a manager’s repertoire of control

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Clan Control: The Role of Empowerment and Culture

Clan control involves creating relationships built on mutual respect and encouraging each individual to take responsibility for his or her actions

Employees work within a guiding framework of values, and they are expected to use good judgment

The emphasis in an empowered organization is on satisfying customers, not on pleasing the boss

Clan control takes a long time to develop and an even longer time to change

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Clan Control: The Role of Empowerment and Culture

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Looking Ahead

After Studying Chapter 17, You will know The processes involved in the development of

new technologies How technologies proceed through a life cycle How to manage technology for competitive

advantage How to assess technology needs The key factors to consider when making

decisions about technological innovation The roles different people play in managing

technology How to develop an innovative organization The key characteristics of successful

development projects

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Performance Standards

A standard is the level of expected performance for a given goals

Performance standards can be set with respect to Quantity Quality Time used Cost

Return

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Measuring Performance

Performance date is commonly obtained from three sources Written reports, which include computer

printouts Oral reports Personal observation

Information must be provided on a timely basis

Return

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Comparing Performance

For some activities relatively small deviations from the standard may be acceptable, in while in others a slight deviation would be serious

The principle of exception states that control is enhanced by concentrating on the exceptions, or significant deviations, from the standard

Return

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Taking Corrective Action

This step ensures that operations are adjusted where necessary to achieve the initially planned results

In computer-controlled production there are two basic types of control Specialist control states that the operators of

computer-numerical-control machines must notify engineering specialists for corrective action to be taken

Operator control states that multi-skilled operators can rectify their own problems as they occur

Return

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Balance Sheet

Te statement itemizes three elements of the organization Assets are the values of the

various items the corporation owns

Liabilities are the amounts a corporation owes to various creditors

Stockholders’ equity is the amount accruing to the corporation’s owners

Return

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Profit and Loss Statement

Comparative statements allow managers to view how income and expenses have changed over the last period

Return

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Financial Ratios

Liquidity ratios indicate a company’s ability to pay short-term debts Current ratio – indicates the extent to which current

assets can decline and still be adequate to pay current liabilities

Leverage ratios show the relative amount of funds in business supplied by creditors or shareholders Debt to equity ratio indicates the company’s ability to

meet its long-term financial obligations Profitability ratios indicate management’s ability

to generate a financial return on sales and/or investments Return on Investment (ROI) is a ratio of profit to

capital used or a rate of return from capitalReturn