Control, Quality and Performance

Uses for Organizational Control

-Helps ensure that a strategy is implemented effectively -Helps ensure that the different areas of the business and the corresponding facets of performance are aligned and consistent with the firm's strategy -Forces executives to refine their strategies -Enables managers to identify areas to improve or enhance quality or reduce costs

Types of Corrective Action

-Training employees -Disciplining employees -Repairing machinery -Revising the target itself to make it more realistic -Changing the metrics as part of revising a strategy -Acknowledging and rewarding high performers

Common Types of Financial Ratios

1. Activity ratio Assess if assets are being used efficiently; also called turnover ratios. 2. Liquidity ratio Assess if the organization can meet short-term obligations to creditors 3. Solvency ratio Assess if the organization can meet longer-term obligations to creditors 4. Profitability ratio Assess if the firm is generating adequate financial returns

Centralized Control

1. Control held by senior managers in an organization 2. Need for employees to be organized and monitored 3. Usually efficient 4. Tends to be rigid 5. Tends to stifle employee creativity

Decentralized Control

1. Delegation of control to lower-level managers in an organization 2. Decision-making autonomy given to lower-level managers 3. Can be less efficient 4. Tends to be more flexible 5. Tends to enhance employee creativity

Select all of the tasks managers must tackle when using the balanced scorecard as a performance management system. (Select all that apply.)

1. Develop objectives, measures, targets, and initiatives for all of the balanced scorecard perspectives. 2. Determine the actions and initiatives necessary to meet desired performance targets. 3. Identify target levels of performance. 4. Translate objectives into measures that can be used to collect information.

Types of Control

1. Input controls Specify the resources that employees have access to A manager controls employee usage of funds by limiting equipment purchases. 2. Behavioral controls Monitor and manage appropriate actions by employees; indicate how, when, and where the work might be done A receptionist directs clients to particular people in an organization 3. Output controls Monitor and manage appropriate results; focus on how the work is actually completed Air carriers track outputs such as the percentage of flights arriving on time.

Organizations go through several steps in the control process

1. Once a corporate vision and strategy are identified, the company devises metrics and targets to make sure the vision and strategy are achieved. 2. Information is collected about company performance and compared against established standards to see if the performance is on track. 3. If performance is off track, managers take corrective action, which can include changing business targets and altering corporate strategies.

Which of the following is part of the Standards step in the control process?

Setting effective goals

Which of the following are total quality management techniques? (Select all that apply.)

Six sigma Quality circles Benchmarking

Centralized and Decentralized Controls

Companies use two main management approaches: centralized control and decentralized control. Note that companies usually are not totally centralized or decentralized, but rather some combination of the two.

Zero-based budgeting

Firms requiring every expenditure be justified to management and re-setting budget items each year may use Zero-based budgeting

Financial ratio analysis

Is the assessment of ratios using data from a balance sheet and income statement to appraise the firm's performance in several key areas. It can be used to compare a firm's performance with the performance of competitors.

Balanced Scorecard

One system used by many companies is the Balanced Scorecard, which captures four areas of performance from different perspectives: -The customer -Internal business processes -Learning and innovation -Financial

There are two types of feedback loops:

Suppose a company's strategy is focusing on selling high-quality costume jewelry to middle-income families. To do this, the firm uses computer ads, but sales are low. Here's how the firm might apply feedback loops: Single-loop learning: Changing actions while keeping the strategy Changing the actions: The company could use a different type of computer ads that might be more effective. Double-loop learning: Fundamentally revisiting the strategy Changing the strategy: The firm might focus on selling to high-income rather than middle-income families.

Single-Loop and Double-Loop Learning

When results fall short of targets, firms might revisit their strategy and ask if it is effective or should be modified. In this way, organizational control provides a feedback loop back to strategy formation. As a result, the company might change its strategy.

Criteria for Effective Goals

With management by objectives, goal-setting is essential for individuals, departments, and organizations. For goals to be effective, they need to satisfy several criteria. -Specific, indicating what needs to be accomplished -Measurable, to be able to tell "how we are doing" -Time bound, specifying a deadline for accomplishment -Challenging, but realistic to motivate employees -Written and communicated to appropriate personnel -Understandable and acceptable to key stakeholders

Cost centers

are a department or unit of a firm to which costs are charged for accounting purposes.

Budgets

are an estimate of income and spending for a set period of time.

Controls

are put in place to help managers monitor performance to ensure that business strategies are well executed and organizational goals are met. It's tough enough for individuals to control certain situations, but think about the importance of control in an organization, whether there are 2 employees or 2,000.

Performance management systems

are tools or methods that organizations can use to monitor and manage performance.

Functional control mechanisms

are various methods an organization uses to ensure its overall health and effectiveness. These methods help firms establish control of the organization in general.

QM involves the use of

continuous improvement, or kaizen, benchmarking, and quality circles.

Both corporate governance controls, and legal and compliance controls, deal with issues related to the firm's ______.

ethical responsibilities

Balance sheets and income statements both provide ______.

firm-level summaries

Organizational control

involves monitoring performance to compare actual results with desired targets and making any necessary improvements. It's important for organizations to know how they're performing, whether they are on track, and what can be done to enhance their performance. This is true at the individual level, and even truer at the levels of teams, departments, and organizations.

Total quality management (TQM)

is a structured approach to organizational management that strives for continuous improvement and enhancement of quality.

Performance variance

is the gap between actual results and a performance target. Example Suppose a manager in a retail operation expects each employee to obtain $15,000 in customer sales each month. The variance is the actual sales minus the target. So if an employee obtains $14,000 of sales in a month, this amount would be subtracted from the target of $15,000. As a result, the variance would be -$1,000.

Expense, cash, and capital budgets all focus on ______.

money flowing out of the organization

Financial statements

provide information that enables managers to determine if an organization is healthy and has performed well in the past. There are two main types of financial statements: balance sheets and income statements: 1. Balance Sheets Show a firm's current financial health List a firm's assets, such as cash, land, and buildings Show liabilities, or what a firm owes banks and others, such as suppliers Show owner's equity (assets minus liabilities) Divide assets and liabilities into short-term and long-term items 2. Income Statements Show how a firm performed last year List a firm's revenues or sales List costs for the production of a product, staff, and other administrative activities Show payments in the form of interest and taxes paid

Budgetary controls

refer to the way the financial and accounting experts in an organization help departments and even teams set budgets to make sure they are performing well.

Managers use key performance indicators (KPIs)

to control the overall performance of their organization.

Corrective Action

when the actual performance differs from expected performance. The goal is to make actual performance match or exceed expected performance. Generally, this is done when performance falls below expectations, but managers can also take action when actual performance is higher than expected.

Types of Functional Control Mechanisms

-Budgetary controls -Human resource controls -Information controls -Corporate governance controls -Legal and compliance controls -Operations controls

Performance management systems can help firms to:

-Clarify and update strategy. -Communicate the details of strategy. -Align goals throughout the firm. -Identify new strategic initiatives. -Conduct periodic performance reviews to improve strategy.

Components of the Balance Scorecard

-Managers translate broader objectives into measures they can collect information on. -For these measures, managers identify a target level of performance to achieve. -Manager decide what actions must be taken to meet these targets. -Managers must develop objectives, measures, targets, and initiatives for all of the balanced scorecard perspectives.

Types of Control

1. Budgetary controls Expense budgets for departments and employees; revenue budgets to track sales 2. Capital budgets For major investments such as equipment 3. Financial statements Balance sheets and income statements 4. Human resource controls Rules and procedures to protect the company; employee surveys to gauge workplace environment 5. Information controls Capturing relevant company data and implementing data security measures 6. Legal/Compliance controls Making sure company employees follow relevant laws and regulations and behave ethically

Put the steps of the benchmarking process in order.

1. Choose a process or activity to compare. 2. Determine your firm's performance 3. Figure out whom you will benchmark, how, and when you will get data 4. Study the systems or practices you plan to compare 5. Collect data and determine best practices 6. Determine what improvements might be made, based on your results.

Improving Overall Quality

1. Continuous Improvement Methods for identifying opportunities to streamline work, reduce waste, and improve quality; also called kaizen 2. Benchmarking Evaluation of organizational performance by comparing it with standards set by other organizations 3. Quality Circle A group of employees that meet regularly to identify problems and improve the quality of organizational processes

Management by Objectives, Performance Indicators, and Performance Measurement

1. Management by Objectives A management model to improve performance by setting clearly defined objectives to which management and employees agree. 2. Key Performance Indicators (KPI) Metrics that are applied to judge if a particular company is on track. KPIs can be used for the organization as a whole, for departments, and even for teams and individuals. 3. Performance Measurement Objective measures that can be tracked across employees and time. By doing this, firms can realize if they are meeting their targets for expected performance.

Perspectives Related to an Organization's Performance

1. The customer perspective -Seeks to improve organizational performance from the view of its customers -Determines if the firm is delivering superior value -Requires measuring and tracking broad notions of quality and customer satisfaction Considers how customers view the following: -Time to process orders -Quality of orders -Cost for the customers -Performance and service 2. Internal business processes -Relates to internal processes of the firm -Focuses on how well customer-focused metrics connect with the objectives of the firm's internal processes Involves quality levels for: -Manufacturing -Turnover rate of employees -Team productivity -Cost and efficiency of manufacturing 3.Learning and innovation/growth -Most forward-looking perspective -Recognizes that employees' capabilities will need to be developed continuously and the firm will need to change to remain competitive -Includes inputs to innovation, innovation process metrics, and building or acquiring intangible assets for future growth -Requires acquiring intangible assets for future growth -Considers time it takes to develop a new product into revenue 4.Financial Performancer -Determines if a firm is profitable, growing, and creating shareholder value -Involves making assessments of profitability or growth of a firm by area, such as division, product line, or country

Complete the following sentence with all of the true statements about financial ratio analysis. Financial ratio analysis ______. (Select all that apply.)

1. includes turnover ratios 2. uses data from a firm's balance sheet and income statement 3. is intended to give insight into a firm's strengths and weaknesses

Types of Budgets

1.Expense budget A detailed summary of anticipated costs for an upcoming time period such as one year 2.Revenue budget A detailed summary of anticipated sales for an upcoming time period such as one year 3.Cash budget A summary of cash needs and uses for an upcoming time period such as one year 4.Capital budget A summary of major investments by a firm such as outlays for equipment for an upcoming time period such as one year

Business use several types of control mechanisms.

1.Human Resources Controls -Rules and procedures to protect the organization. Include personality and drug testing and disciplinary procedures. 2.Information Controls-Information systems that generate the data for financial and accounting reports, enable big data analysis, and provide data security. 3.Corporate Governance Controls-An overall system of rules and practices by which a company is controlled. Includes a discussion of the firm's ethical, social, and environmental responsibilities and the position of chairperson of the board. 4.Legal and Compliance Controls-Ensure that organizations follow relevant laws and regulations; include codes of conduct. 5. Operations Controls-Enhance efficiency and reduce waste in an organization; include total quality management.

Which of the following is part of the Performance Measurement step in the control process?

Calculating performance variance

Benchmarking

Comparing performance with standards set by other firms Involves six steps: 1.Choose an activity or process to compare. 2.Determine your firm's performance. 3.Determine who and when to benchmark and how data is obtained. 4.Study the practices you wish to compare. 5.Gather data and determine best practices. 6.Use results to determine what improvement to make.

Six Sigma uses a five-step problem-solving process summarized by DMAIC.

DMAIC steps Define Measure Analyze Improve Control

Uses of Organizational Control

Goals-To detect and respond to ethical/legal issues Examples -A company uses specialized software to detect fraud in the organization. Goals-To help nonprofits protect themselves Examples - A charitable organization uses competitive bidding processes to locate the most cost-effective suppliers. Goals-To empower and develop employees Examples - A firm moves goals to lower levels and then holds employees accountable for outcomes under their control. Goals -To identify areas to improve quality or reduce costs Examples - A factory monitors its supply chain to identify risks and puts in place management controls to reduce these risks and thereby reduce costs.

Methods of Collecting Information

Managers need to collect information over time to compare actual performance against the expected performance. They can use a variety of methods to collect this information: Surveys -Can be both internal and external surveys -Allow the company to determine how satisfied customers are with its performance -Subjective but can be valuable to find out how the market perceives the firm and its employees Personal Observations -Provide direct information about the performance of an employee -Have drawbacks such as subjectivity and limited time for observation -Include reports by others, including immediate supervisors, peers, or subordinates Written Reports -May be statistical or derived from objective data contained in statistical analyses or in financial and accounting statements -Should compare the actual performance against the targeted, expected level of performance

Steps in the Control Process

Step 0. Vision and Strategy -Establish clarity on the desired outcomes for an organization and the means to those ends. -This is the function of strategy, an important input to the process of control. -Control must serve the organization's vision, strategy, and planning processes. Step 1. Standards -Devise the metrics that will be used and the particular target for each metric. -Use key performance indicators (KPI) that are measurable, achievable, relevant, and timely. -Use benchmarking based on historical performance or the performance of competitors to set challenging targets for employees. Step 2. Measurement -Collect information over time using internal data and reports, surveys, or personal observations. -Use the information to measure actual performance and see if it meets targets. Step 3. Corrective Action -When performance exceeds targets, reward employees or provide additional resources for the team. -When performance fails short of targets, encourage employees to get additional training. develop performance improvement plans, or take disciplinary actions.

Select the most accurate statement regarding performance management systems in organizations.

The balanced scorecard is one of the most widely used performance management systems.

Quality Circle

Using a group of employees to identify problems and improve quality Involves following guidelines: 1.Members must volunteer. 2.Groups choose their own leader; management provides a mentor. 3.Groups must have functional diversity. 4.Problems are addressed in the circle. 5.Management must be supportive of circle. 6.Participants require training in problem solving.

Developing standards is an important part of the control process. This involves

devising metrics and the particular target for each metric.

Six Sigma

is a set of management techniques and statistical methods to improve business processes to reduce errors or product defects. They are used in total quality management .These techniques derive from a statistical value that is equal to a definition of 99.9997 percent quality. This means that defects arise less than 3.4 times out of one million.