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1 Chapter 16 Control Designed & Prepared by B-books, Ltd. MGMT Chuck Williams
1
Chapter 16Control
Designed & Prepared byB-books, Ltd.
MGMT
Chuck Williams
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Basics of Control
After reading this section, you should be able to:
1. describe the basic control process.
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The Control ProcessBegins by establishing clear standards of performance
Begins by establishing clear standards of performance
Involves comparing actual performance to desired performance
Involves comparing actual performance to desired performance
Takes corrective action to repair performance deficiencies
Takes corrective action to repair performance deficiencies
Is a dynamic, cybernetic processIs a dynamic, cybernetic process
Consists of feedback control, concurrent control, feedforward control
Consists of feedback control, concurrent control, feedforward control
But… controlisn’t always
worthwhile or possible
But… controlisn’t always
worthwhile or possible
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4
Setting Standards1. A good standard must enable goal
achievement
2. Listening to customers or observing competitors
3. Benchmarking other companies– Determine what to benchmark.– Identify the companies against which to benchmark.– Collect data to determine other companies’
performance standards.
1.11.1
5
Corrective Action
• Identify performance deviations
• Analyze those deviations
• Develop and implement programs to correct them
ControlControlProcessProcessControlControlProcessProcess
CorrectCorrect
IdentifyIdentify
Analyze
Analyze1.31.3
6
Dynamic, Cybernetic Process
Develop & ImplementProgram for
Corrective Action
Develop & ImplementProgram for
Corrective Action
Set StandardsSet Standards
Measure Performance
Measure Performance
Compare withStandards
Compare withStandards
IdentifyDeviations
IdentifyDeviations
AnalyzeDeviations
AnalyzeDeviations
1.41.4
7
Feedback, Concurrent, and Feedforward Control
FeedbackControl
FeedbackControl
Gather information about performancedeficiencies after they occur
Gather information about performancedeficiencies after they occur
ConcurrentControl
ConcurrentControl
Gather information about performancedeficiencies as they occur
Gather information about performancedeficiencies as they occur
FeedforwardControl
FeedforwardControl
Monitor performance inputs ratherthan outputs to prevent or minimizeperformance deficiencies before they occur
Monitor performance inputs ratherthan outputs to prevent or minimizeperformance deficiencies before they occur
1.51.5
8
Feedforward Control
Guidelines for Using Feedforward Control
1. Thorough planning and analysis are required.
2. Careful discrimination must be applied in selecting input variables.
3. The feedforward system must be kept dynamic.
4. A model of the control system should be developed.
5. Data on input variables must be regularly collected.
6. Data on input variables must be regularly assessed.
7. Feedforward control requires action.
1. Thorough planning and analysis are required.
2. Careful discrimination must be applied in selecting input variables.
3. The feedforward system must be kept dynamic.
4. A model of the control system should be developed.
5. Data on input variables must be regularly collected.
6. Data on input variables must be regularly assessed.
7. Feedforward control requires action.1.51.5
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Control LossIs control
worthwhile?
Maybe,
maybe not.
Managers mustassess the regulation costs and the cybernetic feasibility.
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Control Methods
After reading these sections, you should be able to:
2. discuss the various methods that managerscan use to maintain control.
3. describe the behaviors, processes, and outcomes that today’s managers are choosing to control their organizations.
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Control Methods
NormativeNormative ConcertiveConcertive Self-ControlSelf-Control
BureaucraticBureaucratic ObjectiveObjective
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Bureaucratic Control
• Top-down control
• Use rewards and punishment to influence employee behaviors
• Use policies and rules to control employees
• Often inefficient and highly resistant to change
2.12.1
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Objective Control
ObjectiveControl
ObjectiveControl
Use of observable measures of workerbehavior or outputs to assessperformance and influence behavior
Use of observable measures of workerbehavior or outputs to assessperformance and influence behavior
BehaviorControl
BehaviorControl
Regulation of the behaviors andactions that workers perform on the job
Regulation of the behaviors andactions that workers perform on the job
OutputControl
OutputControl
Regulation of workers’ results oroutputs through rewards andincentives
Regulation of workers’ results oroutputs through rewards andincentives
2.22.2
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Effective Output Control
1. Output control measures must be reliable, fair, and accurate.
2. Employees and managers must believe that they can produce the desired results.
3. The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance.
2.22.2
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Normative ControlCreated by:
– careful selection of employees– observing experienced employees & listening to stories about the companyNormative
Control
NormativeControl
2.32.3
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Concertive Control
Autonomous work groups– operate without managers
– group members control processes, output, and behaviors
ConcertiveControl
ConcertiveControl
Regulation of workers’ behavior anddecisions through work group values and beliefs
Regulation of workers’ behavior anddecisions through work group values and beliefs
2.42.4
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Self-Control
• Also known as self-management
• Employees control their own behavior
• Employees make decisions within well-established boundaries
• Managers teach others the skills they needto maximize work effectiveness
• Employees set goals and monitor their own progress
2.52.5
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What to Control?
CustomerDefections
CustomerDefections QualityQuality Waste and
Pollution
Waste andPollution
BalancedScorecard
BalancedScorecard
Budgets,Cash Flow,
EVA
Budgets,Cash Flow,
EVA
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The Balanced Scorecard
CustomerPerspective
CustomerPerspective
InternalPerspective
InternalPerspective
Innovation and LearningPerspective
Innovation and LearningPerspective
FinancialPerspective
FinancialPerspective
3.13.1
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Advantages of the Balanced Scorecard
1. Forces managers to set goals and measureperformance in each of the four areas
2. Minimizes the chances of suboptimization– performance improves in one area at the
expense of others
3.13.1
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The Balanced Scorecard:Southwest Airlines
3.13.1
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The Financial Perspective
Cash flow analysis
Cash flow analysis
Predicts how changes in a business will affect its ability to take in more cash than it pays out
Predicts how changes in a business will affect its ability to take in more cash than it pays out
Balance sheetsBalance sheets Provide a snapshot of a company’sfinancial position at a particular time
Provide a snapshot of a company’sfinancial position at a particular time
Income statements
Income statements
Show what has happened to an organization’s income, expenses, and net profit over a period of time
Show what has happened to an organization’s income, expenses, and net profit over a period of time
Financialratios
Financialratios
Used to track liquidity, efficiency, and profitability over time comparedto other businesses in its industry
Used to track liquidity, efficiency, and profitability over time comparedto other businesses in its industry
3.23.2
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Basic Accounting Tools
1. Forecast sales
2. Project changes in anticipated cash flows
3. Project anticipated cash outflows
4. Project net cash flows by combining anticipated cash inflows and outflows
Steps for a Basic Cash Flow AnalysisSteps for a Basic Cash Flow Analysis
Beyond the Book
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Basic Accounting Tools
1. Assets• Current assets• Fixed assets
2. Liabilities• Current liabilities• Long-term liabilities
3. Owner’s equity• Stock• Additional paid in capital• Retained earnings
Parts of a Basic Balance SheetParts of a Basic Balance Sheet
Beyond the Book
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Basic Accounting Tools
SALES REVENUE- sales returns and allowances+ other income= NET REVENUE- cost of goods sold= GROSS PROFIT- total operating expenses= INCOME FROM OPERATIONS- interest expense= PRETAX INCOME- income tax= NET INCOME
Basic Income StatementBasic Income Statement
Beyond the Book
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Financial Ratios
LIQUIDITY RATIOS
Current Ratio
Quick (Acid Test) Ratio
LIQUIDITY RATIOS
Current Ratio
Quick (Acid Test) Ratio
LEVERAGE RATIOS
Debt to Equity
Debt Coverage
LEVERAGE RATIOS
Debt to Equity
Debt Coverage
EFFICIENCY RATIOS
Inventory Turnover
Average CollectionsPeriod
EFFICIENCY RATIOS
Inventory Turnover
Average CollectionsPeriod
PROFITABILITY RATIOS
Gross Profit Margin
Return on Equity
PROFITABILITY RATIOS
Gross Profit Margin
Return on Equity
Beyond the Book
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Common Kinds of Budgets
CashBudgets
CashBudgets
Used to forecast the cash a company will have for expenses
Used to forecast the cash a company will have for expenses
ExpenseBudgets
ExpenseBudgets
Used to determine spending onsupplies, projects, or activities
Used to determine spending onsupplies, projects, or activities
ProfitBudgets
ProfitBudgets
Used by profit centers, which have“profit and loss” responsibility
Used by profit centers, which have“profit and loss” responsibility
RevenueBudgets
RevenueBudgets
Used to project or forecastfuture sales
Used to project or forecastfuture sales
Variable BudgetsVariable Budgets Used to project costs acrossvarying levels of sales/revenues
Used to project costs acrossvarying levels of sales/revenues
Capital ExpenditureBudgets
Capital ExpenditureBudgets
Used to forecast large, long-lasting investments
Used to forecast large, long-lasting investments
3.23.2
Beyond the Book
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Economic Value Added (EVA)
Economic ValueAdded
Economic ValueAdded
The amount by which company profits exceed the cost of capital in a given year
The amount by which company profits exceed the cost of capital in a given year
Common Costs of CapitalCommon Costs of Capital
Long-term bank loans Interest paid to bondholders Dividends and growth in stock value that accrue to
shareholders
Long-term bank loans Interest paid to bondholders Dividends and growth in stock value that accrue to
shareholders
3.23.2
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Economic Value Added (EVA)
1. Calculate net operating profit after tax
1. Calculate net operating profit after tax
2. Identify how much capitalthe company has invested
2. Identify how much capitalthe company has invested
3. Determine the cost paidfor capital
3. Determine the cost paidfor capital
4. Multiply capital used (step 2)times cost of capital (step 3)
4. Multiply capital used (step 2)times cost of capital (step 3)
5. Subtract total dollar cost of capital from net profit after taxes
5. Subtract total dollar cost of capital from net profit after taxes
$3,500,000$3,500,000
$16,800,000$16,800,000
10%10%
(10% x $16,800,000) = $1,680,000
(10% x $16,800,000) = $1,680,000
$3,500,000 net profit-$1,680,000 cost of capital$1,820,000 EVA
$3,500,000 net profit-$1,680,000 cost of capital$1,820,000 EVA
3.23.2
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Why Is EVA Important?• Shows whether a business, division, department,
profit center, or product is paying for itself
• Makes managers at all levels pay closer attention to their segment of the business
• Encourages managers
and workers to be
creative in looking for
ways to improve
EVA performance3.23.2
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The Customer PerspectiveControlling Customer Defections
• Monitoring customer defections: – identify which customers are leaving the
company
– measuring the rate at which they are leaving
• Obtaining a new customer costs ten times as much as keeping a current one
• Customers who have left are likely to tell you what you are doing wrong
• Understanding why a customer leaves can help fix problems and make changes3.33.3
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The Internal PerspectiveControlling Quality
ExcellenceExcellence
ValueValue
Conformance to ExpectationsConformance to Expectations
3.43.4
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The Innovation and Learning Perspective
Continuous improvement in products and services
Continuous improvement in products and services
Relearning and redesigning the processes by which products
And services are created
Relearning and redesigning the processes by which products
And services are created
3.53.5
