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Chapter Fourteen
Managerial Control
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Managerial Control
Control Any process that directs the activities of
individuals toward the achievement of organizational goals
The Siamese twins of management• Planning• Control
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Signs that a Company Lacks Controls
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Broad Categories of Control
Bureaucratic control The use of rules, regulations, and authority to
guide performance
Market control Control based on the use of pricing mechanisms
and economic information to regulate activities within organizations
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Broad Categories of Control
Clan control Control based on the
norms, values, shared goals, and trust among group members.
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The Control Process
Figure 14.1
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Control Systems have Four Steps
1. Setting performance standards.2. Measuring performance.3. Comparing performance against the
standards and determining deviations.4. Taking action to correct problems and
reinforce successes.
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Step1-Setting Performance Standards
Standard Expected performance for a given goal: a target that
establishes a desired performance level, motivates performance, and serves as a benchmark against which actual performance is assessed.
Performance standards can be set with respect to:• quantity• quality• time used• Cost
Ex. Pizza delivery time-40 minutes, 95% customer satisfaction, increasing sales by
5%, decreasing accidents by 10%, decreasing employee absences by 30%, increasing productivity by 5%, increasing quality to 98%, etc.
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Setting Standards
1. A good standard must enable goal achievement.
2. Companies determine standards by listening to customers or observing competitors.
3. Standards can be determined by benchmarking other companies. Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies’ performance
standards.
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Step2-Measuring Performance
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Step3-Comparing Performance with the Standard
Principle of exception A managerial principle stating that control is
enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard.
Step4-Corrective Action
• Identify performance deviations
• Analyze those deviations
• Develop and implement programs to correct them
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ControlControlProcessProcessControlControlProcessProcess
CorrectCorrect
IdentifyIdentify
Analyze
Analyze
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Dynamic, Cybernetic Process
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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
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Three Basic Control Methods
FeedbackControl
FeedbackControl
ConcurrentControl
ConcurrentControl
FeedforwardControl
FeedforwardControl1.51.5
the control process used before operations begin, including policies, procedures, and rules designed to ensure that planned activities are carried out properly
is the control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed.
control that focuses on the use of information about previous results to correct deviations from the acceptable standard.
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Control Isn’t Always Worthwhile or Possible
Control is achieved when behavior and work procedures conform to standards and goals are accomplished.
• Control loss occurs when behavior and work procedures do not conform to standards.
Implementing controls isn’t always worthwhile or possible because: Regulation costs
• Whether the costs and both intended and unintended consequences of control exceed its benefits.
Cybernetic feasibility• The extent to which it is possible to implement each step
in the control process. If one or more steps cannot be implemented, then maintaining effective control may be difficult or impossible. 16
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The Role of Six Sigma
At a six-sigma level, a process is producing fewer than 3.4 defects per million, which means it is operating at a 99.99966 percent level of accuracy
Six Sigma companies have not only close to zero product or service defects but also substantially lower production costs and cycle times and much higher levels of customer satisfaction
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Management Audits ControlVarious Systems
Management audit An evaluation of the
effectiveness and efficiency of various systems within an organization
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Management Audits ControlVarious Systems
External audit An evaluation
conducted by one organization, such as a CPA firm, on another.
Internal audit A periodic
assessment of a company’s own planning, organizing, leading, and controlling processes.
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External Audit
1. Investigates other organizations for possible merger or acquisition
2. Determines the soundness of a company that will be used as a major supplier
3. Discovers the strengths and weaknesses of a competitor to maintain or better exploit the competitive advantage of the investigating organization
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Internal Audit
1. Assesses what the company has done for itself
2. What it has done for its customers or other recipients of its goods or services.
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Budgetary Controls
Budgeting The process of investigating what is being done
and comparing the results with the corresponding budget data to verify accomplishments or remedy differences
also called budgetary controlling.
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Budgetary Controls
Fundamental budgetary considerations proceed through three stages: Establishing expectancies starts with the broad
plan for the company and the estimate of sales, and it ends with budget approval and publications.
Budgetary operations stage deals with finding out what is being accomplished and comparing the results with expectancies.
The last stage involves taking corrective action when necessary.
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A Sales-Expense Budget
Exhibit 14.3
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Types of Budgets
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Types of Budgets
Sales budget usually prepared by month, sales area, and product.
Production budget is expressed in physical units.Cost budget is used for areas of the organization
that incur expenses, but bring in no revenue, such as accounting, HR, Legal, etc.
Cash budget is prepared after all other budget estimates are completed.
Capital budget is used for the cost of fixed assets such as plant and equipment.
Master budget includes all major activities of the business.
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Checking the Checkers
Accounting audits Procedures used to
verify accounting reports and statements.
Performed by outside CPA firm.
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Activity-Based Costing
Activity-based costing (ABC) A method of cost accounting designed to identify
streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities
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How Dana Discovers WhatIts True Costs Are
Exhibit 14.5
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Balance Sheet
Balance sheet A report that shows the financial picture of a
company at a given time and itemizes assets, liabilities, and stockholders’ equity.
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Balance Sheet
Assets The values of the
various items the corporation owns.
Liabilities The amounts a
corporation owes to various creditors
Stockholders’ equity The amount accruing
to the corporation’s owners.
Assets = Liabilities + Stockholders’ equity
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Profit and Loss Statement
Profit and loss statement An itemized financial
statement of the income and expenses of a company’s operations
Exhibit 14.7
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Financial Ratios
Current ratio A liquidity ratio that indicates the extent to which
short term assets can decline and still be adequate to pay short-term liabilities
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Financial Ratios
Debt-equity ratio A leverage ratio that indicates the company’s
ability to meet its long-term financial obligations
Return on investment (ROI) A ratio of profit to capital used, or a rate of return
from capital
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Using Financial Ratios
Management myopia Focusing on short-
term earnings and profits at the expense of longer-term strategic obligations.
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Bureaucratic Control has a Downside
Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of trouble by following the rules. a. Tactical behavior – the most common type of tactical
behavior is to manipulate information or report false performance data.
Resistance occurs for several reasons: a. Comprehensive control systems increase the accuracy
of performance data and make employees more accountable for their actions.
b. Control systems can change expertise and power structures.
c. Control systems can change the social structure of the organization.
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More Effective Control Systems
The systems are based on valid performance standards.
They communicate adequate information to employees.
They are acceptable to employees.They use multiple approaches.They recognize the relationship between
empowerment and control.
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Balanced Scorecard
Balanced scorecard Control system combining four sets of
performance measures: financial, customer, business process, and learning and growth
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The Balanced Scorecard
CustomerPerspective
How do customers see us?
CustomerPerspective
How do customers see us?
InternalPerspective
At what must we excel?
InternalPerspective
At what must we excel?
Innovation and LearningPerspective
Can we continue to createvalue?
Innovation and LearningPerspective
Can we continue to createvalue?
FinancialPerspective
How do we look toshareholders?
FinancialPerspective
How do we look toshareholders?
Encourages managers to look at four different perspectives on company performance.
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, but at the
expense of others
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The Balanced Scorecard:Southwest Airlines
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Market Control
Market control involves the use of economic forces and the pricing mechanisms that accompany them to regulate performance.
Market controls let supply and demand determine prices and profits
Market controls at the corporate level are used to regulate independent business units.
Market controls at the business unit level regulate exchanges among departments and functions.
Market controls at the individual level provide a natural incentive for employees to enhance their skills and offer them to potential firms.
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Examples of Market Control
Exhibit 14.9
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Clan Control
Clan control - creating relationships built on mutual respect and encouraging the employee to take responsibility for his or her actions
Clan control relies on empowerment and culture 1.Bureaucratic controls don’t work well today
because:• a. Employees’ jobs have changed – nature of work is
evolving.• b. The nature of management has changed.• c. The employment relationship has changed.
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Clan Control
Managers must empower employees by: a. putting control where the operation is b. using ‘real time’ rather than after-the-fact
controls c. rebuilding the assumptions underlying
management control to build on trust rather than distrust
d. moving to control based on peer norms e. rebuilding the incentive systems to reinforce
responsiveness and teamwork 14-46
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Management Control in anEmpowered Setting
Put control where the operation is.Use real-time rather than after-the-fact controls.Rebuild the assumptions underlying
management control to build on trust rather than distrust.
Move to control based on peer norms.Rebuild the incentive systems to reinforce
responsiveness and teamwork.
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http://bevideos.mhhe.com/business/video_library/0077424611/swf/Clip_06.html
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Video: Manufacturing
Can America thrive without manufacturing jobs?
What should be combined with labor costs? Why?