Chapter ObjectivesAfter studying this chapter and the case exercises at the end, you should be able to:Rate the adequacy of a managers control system.Recommend specific feedforward, concurrent, and feedback controls a manager should use to control the activity.Write a simple budget for a manager.Specify a strategic ratio a manager should have employees focus on.List 10 measures a manager can use to build a balanced scorecard.

Control: A Central Issue in ManagementControlThe task of ensuring that activities are providing the desired results. All control systems try to influence behaviour.Controlling involves setting a target (planning), measuring performance (evaluation), and taking corrective action.Control also applies to monitoring every tasklarge and smallthat is delegated.

Management and the Control Process FIGURE 161Source: Gary Dessler, PH.D

Types of Process ControlsSteering ControlControls that predict results and let the manager take corrective action before the operation or project is completed.Concurrent (or Yes/No) ControlA control system in which the manager exercises control as the activity takes place, and the work may not proceed until or unless it is acceptable.Feedback (or Post-Action) ControlAny control where results are compared to the standard after the project is complete.

Types of Process ControlsQuality ControlThe activities that are carried out to ensure that the quality level of all goods and services meets the standards required by customers.Total Quality Management (TQM)A control concept based on the idea that no defects are tolerable and that employees are responsible for maintaining quality standards.

Approaches to Maintaining ControlThe Traditional Control ProcessStep 1:Set a standard, target, or goal.Step 2:Measure actual performance against standards (observation and timing).Step 3: Take corrective action.The Commitment-Based Control ProcessRelies on employees self-control to do the right things.

The Traditional Control Process

Types of Traditional Control SystemsDiagnostic controlsFormal, pre-planned, methodical systems that help managers zero in on discrepancies.

Two Basic Categories of Control Systems

Types of Performance StandardsStandardsCriteria for evaluating the quality and quantity of the products or services produced by employees.Time StandardsStandards that state the length of time it should take to complete a task.Output StandardsStandards that state the quantity of the product or service that employees should be producing.

Types of Performance StandardsCost StandardsStandards that state the maximum cost that should be incurred in the course of producing goods and services.Quality StandardsStandards that define the level of quality that is to be maintained in the production of goods and services.Behavioural StandardsStandards that state the types of behaviour that are acceptable for employees.

Measuring PerformanceThe goal is to accurately measure the output that has resulted from employees efforts.Output can be measured in various ways:Personal observationWritten reports from subordinates about their performanceOral reports from subordinates about their performance

Comparing Performance with StandardsControl tolerancesState the degree of deviation from the standard that is permissible.

Take Corrective ActionImmediate corrective actionActions that solve the problem immediately and get output back to the desired level.Long-term corrective actionDetermines why deviations occur and what can be done to prevent the problem from happening in the future.

Checklist 16.1Requirements of Adequate ControlsControls should reflect the nature and needs of the activity.Controls should report deviations promptly.Controls should be forward-looking.Controls should point up exceptions at strategic points.Controls should be objective.Controls should be flexible.Controls should reflect the organization structure.Controls should be economical.Controls should be understandable.Controls should indicate corrective action.

Diagnostic Control SystemsPrinciple of Exception (Management by Exception)To conserve managers time, only significant deviations or exceptions form the standard should be brought to the managers attention.

The Basic Management Control SystemBudgetFormal financial expression of a managers plans.Sales BudgetA budget that shows the planned sales activity for each period (usually in units per month) and the revenue expected from the sales.Operating BudgetA budget that shows the expected sales and/or expenses for each of the companys departments for the planning period in question.

Pro Forma Profit Planning Income StatementShows expected sales, expected expenses, and expected income or profit for the year.Cash BudgetA control that shows, for each month, the amount of cash the company can expect to receive and the amount it can expect to disperse.Balance SheetA control that shows managers, owners, and creditors what the companys projected financial picture should be at the end of the year.

Example of a Budget

Performance ReportingVariancesDifferences between budgeted and actual amounts.AuditA systematic process of objectively obtaining and evaluating evidence regarding important aspects of the firms performance, judging the accuracy and validity of the data, and communicating the results to interested users.Financial RatioCalculations that compare one financial indicator on a financial statement to another.

Example of a Performance Report

Widely Used Financial Ratios FIGURE 165a

Widely Used Financial Ratios (contd) FIGURE 165b

Widely Used Financial Ratios (contd) FIGURE 165c

Widely Used Financial Ratios (contd) FIGURE 165d

Ratio Analysis: Factors Affecting Return on Investment FIGURE 166

Financial Responsibility CentresFinancial responsibility centresUnits that are responsible for, and measured based on, a specific set of financial activities.Profit centresResponsibility centres whose managers the company holds accountable for profit.Revenue centresResponsibility centres whose managers are accountable for generating revenues.

Other Diagnostic Financial and Managerial ControlsActivity-Based Costing (ABC)A method for allocating costs to products and services that takes all the products costs (including production, marketing, distribution, and sales activities) into account.

Other Diagnostic Financial and Managerial Controls (contd)Balanced ScorecardA management tool, usually a computerized model, that traces a multitude of performance measures simultaneously and shows their interactions.Enterprise Resource Planning SystemA companywide integrated computer system that gives managers real-time, instantaneous information regarding the costs and status of every activity and project in the business.

Boundary Control SystemsBoundary ControlsSystems that set the boundaries within which the firm expects employees to operate, including ethics standards, codes of conduct, and strategic policies.Steps in establishing boundary controls:Emphasize top managements commitment.Publish a code.Establish compliance mechanisms.Measure results.

Johnson & Johnsons Corporate Credo FIGURE 167Source: Source: Courtesy of Johnson & Johnson.

Interactive Control SystemsInteractive ControlA system that maintains control by personally monitoring how everyone is doing.

Behavioural Consequences of ControlsBehavioural displacementWhen controls encourage behaviours that are inconsistent with what the company actually wants to accomplish.GamesmanshipManagement actions that improve the managers performance in terms of the control system, without producing any economic benefits for the firm.

Behavioural Consequences of Controls (contd)Operating delaysWatch for control systems that unnecessarily slow things downStreamlining an approval process helps solve this problemNegative attitudesTraditional control systems frequently trigger negative employee attitudes

Implementing Commitment-Based Control SystemsCommitment-Building SystemsMotivation TechniquesBelief SystemsCommitment-Based Control System

Using Commitment-Building Systems to Foster Self-ControlFoster People-First ValuesGuarantee Organizational JusticeBuild a Sense of Shared Fate and CommunityUse Value-based HiringCommunicate Your Vision Financial Rewards and Profit SharingEncourage Personal Development and Self-Actualization