Quiz 4 Availability – see calendar Will cover Chapters 13, 14, 15, 16, & 17

Chapter 16

Management Control

Learning ObjectivesAfter reading this chapter, you should be able to: Describe management control and understand the

importance of control systems.

Identify the four basic management control approaches.

Describe the steps a manager would take to apply a bureaucratic control process.

Identify the major types of bureaucratic control.

Generate the basic framework for a balanced scorecard.

Differentiate between market and financial control.

Distinguish between system and person factors as the focus of control.

The Importance of ControlControl is the process of comparing

performance to standards and taking corrective action.

It ensures that: standards are met errors are limited quality is acceptable products are safe the company is performing at the highest

possible level

Control is closely associated with planning.

Categorization of Control ApproachesControl approaches can be categorized according to two

factors – type and focus:

Type - divided into formal and informal approaches Formal control systems consist of written rules Informal control systems rely on unwritten

expectations

Focus – directed at the outcome or the process Outcome approach focuses on the results of a

business process Process approach focuses on how the work is

performed

Control Approaches Model

Informal Formal

Type

Outcomes

Process

Focus

Subjective Control

Clan Control

Marketing Control

Financial Controls

Operations Management

Bureaucratic Control

Balanced Scorecard

Informal and Outcome-Focused ControlCharacterized by subjective control - an

informal approach based on global assessment of outcomes

Subjective control: does not typically utilize explicit standards does not specify how deviations from an acceptable

level should be handled is common in smaller businesses and service

settings is the “no news is good news” approach

Formal and Process-Focused Control: Bureaucratic Control

Bureaucratic control is a formal control approach that operates in a cycle and is characterized by written guidelines and controls.

Involves: the application of standards to assess

performance the application of corrective actions to

regulate performance and bring it back to the level of the standards.

The Bureaucratic Control Process

1. Establishing Standards

2. Performance Measurement

3. Identifying Gaps

4. Corrective Action

The Bureaucratic Control Process (cont) Establishing Standards

Standards should be participative rather than simply implemented from the top down so that employees understand and are committed to them.

Standards come from: goals statistical analysis benchmarking

Performance Measurement Use of objective data, which is free from error or

bias Use of subjective data, which involves human

judgement

The Bureaucratic Control Process (cont)

Identifying Gaps Compare standards with performance measures Upper and lower control limits establish:

acceptable variations normal variations unacceptable variations

Corrective Action What should management do?

Nothing Take action Change standards

Types of Bureaucratic Control

Feedforward Control

Concurrent Control

Feedback Control

Types of Bureaucratic Control (cont.)

Feedforward controlDesigned to prevent problems before they

occur

Concurrent controlTakes place as the work process is being

carried out

Feedback controlOccurs after a process has been completed

The Balanced ScorecardA balanced scorecard is a technique

designed to control and improve: customer service learning and growth finance internal business processes

Links strategy to actionIs more broad than bureaucratic controlFocus on:

priorities the work process how things are done

Balanced Scorecard FormatObjectives Measures Targets Initiatives

Financial - what we need todo to succeedfinancially

Customer - what we need todo to excel atcustomer service

Internal BusinessProcesses - whatwe need to do to have world class processes

Learning and Growth - how to change and increaseour potential andeffectiveness

Formal and Outcome-Focused ControlThe regulation of performance by applying the standards or guidelines to the outcomes of a process through:

Market control - the use of indicators of market values as standards for regulating performance

Financial controls - the use of various monetary measures to regulate performance

Types of Financial Controls

Budgetary Control Financial Statements

Financial Ratios Activity-BasedCosting

Types of Financial Controls (cont.)

Budgetary control - used to specify amounts to be expended for various activities or eventsCan help managers control and predict

costs

Financial Statements - tools that are used to assess and control the financial health of an organizationBalance sheetsProfit and loss (income) statements

Types of Financial Controls (cont.)

Financial Ratios - provide an overall check of performance Liquidity ratios - an organization’s ability to pay

short-term debt Leverage ratios - the amount of funds available in

an organization from shareholders and creditors Profitability ratios - indicate the amount of financial

return from an investment

Activity-Based Costing - associates costs with tasks calculated for:

receiving and processing sales orders expediting supplies and production distribution resolving errors and problems

Informal and Process-Focused ControlEmphasizes an implicit sense and common understanding of how things should be done

Does not rely on explicit guidelines and standards

Assumes that people have an internal set of standards that will guide how they perform

Clan ControlClan control is a reliance on corporate culture and the norms it develops as an informal means for regulating the work process

Employees control themselves

Clan control works best if:the organization is constantly changingthe organization has a strong culture

Management Control RevisitedShould control be directed at people, systems, or some other aspect of the company?

Emphasis should be on systems and performance rather than people.

Focusing on people can result in resistance and negative reactions

Management Minicase 16:1 Standards for Quality Control

Individual/Collaborative Learning CaseProfit vs Equity