Chapter 8- Control, Change, and Entrepreneurship

Quick Ratio

(Current Assets - Inventory) / Current Liabilities shows whether they can pay these claims without selling inventory

1) Assess the need for change

- Recognize that there is a problem (look at performance measures and detect gaps b/t desired and actual perf) - Identify the source of the problem (look at structure, and environment)

Effective Control Systems

- flexible enough to allow managers to respond as necessary to unexpected events -provides accurate information about organizational performance - gives managers information in a timely manner because making decisions on the basis of outdated information is a recipe for failure.

Problems with Output Control

-Managers must create output standards that motivate at all levels -Should not cause managers to behave in inappropriate ways to achieve organizational goals

4 steps in the organizational change process

1. Assess the need for change 2. Decide on the change to make 3. Implement the change 4. Evaluate the change

Effective Output Control

1. Objective financial measures 2. Challenging goals and performance standards 3. Appropriate operating budgets

3) Implementing the change

1. Top down change or bottom up change 2. introduce and manage change

Successful MBO

1. Top managers must be committed 2. It must be applied organization wide 3. Objectives must be cascading It depends on managers' ability to create an organizational control system that -measures performance accurately and fairly -links performance evaluations to rewards so employees stay motivated - coordinate their activities to achieve the organization's mission and goals.

Direct supervision disadvantages

1. expensive (a lot of managers will be needed to supervise) -hence why output control is preferred 2. demotivates subordinates: - too much scrutiny leaves subs feeling inaccurate/impartial (making them avoid responsibility, and cease cooperating with others) -may feel others are being favoriteed 3. not feasible: complex jobs make performance evals more difficult ex: The performance of divisional and functional managers can be evaluated only over relatively long periods (which is why an output control system is developed), so it makes little sense for top managers to continually monitor their performance.

Current Ratio

=current assets/current liabilities tells managers whether they have the resources available to meet the claims of short-term creditors.

Return on Investment (ROI)

=net profit before taxes/ total assets the most commonly used financial performance measure because it assesses competitive advantage: allows managers of one organization to compare performance with that of other organizations.

operating budget

A budget that states how managers intend to use organizational resources to achieve organizational goals. 1. Typically managers at one level allocate to subordinate managers a specific amount of resources to produce goods/services. 2. Once they have been given a budget, these lower-level managers must decide how to allocate money for different organizational activities. 3. then are evaluated on ability to stay w/in budget and make best use of avail. resources Approaches to op budgets: -cost/expense budget approach -revenue budget approach -profit budget approach

Entrepreneurship and management

An entrepreneur must hire managers who can create an operating and control system that allows a new venture to survive and prosper. founding entrepreneur usually does not have the management skills to successfully control and change the business over time. -lack an understanding of how to create the control structure necessary to manage a successful long-term strategy. -Not recognize the need to change their companies because they are so close to them. The entrepreneur then holds a senior planning and advisory role in the company, often chairing its board of directors.

What can lower or destroy MBO's effectiveness as a control system

Any suggestion that personal biases and political objectives play a part in the evaluation process SO Managers and their subs at all levels must believe that performance evaluations are accurate and fair.

Bureaucratic Control

Control of behavior by means of a comprehensive system of rules and standard operating procedures. When direct supervision is too expensive and management by objectives is inappropriate It is most useful when organizational activities are routine and well understood and when employees are making programmed decisions (ex: in mass-production set- tings such as Ford or in routine service settings such as stores like Target or Starbucks). All organizations make extensive use of bureaucratic control because rules and SOPs effectively control routine organizational activities. Employees are trained to follow the rules that have proved to be most effective in a particular situation, and the better trained the employees are, the more standardized is their behavior and the more trust managers can have that outputs (such as food quality) will be consistent.

concurrent control

Conversion Stage: Control that gives managers immediate feedback on how efficiently inputs are being transformed into outputs so managers can correct problems as they arise. -alerts managers to problem sources in production process (defective batch of inputs, ill aligned machines) EX: Individual workers have the authority to push a button to stop the assembly line whenever they discover a quality problem. When all problems are corrected, the result is a finished product that is much more reliable.

2) Deciding on the change to make

Decide what the organization's ideal future state would be: -types of goods and services it should produce -what is the b-level strat -how org structure can be changes Identify obstacles to change. C level obstacles: organization's present strategy & structure -inert cultures and bureaucratic organizations divisional/ departmental changes: Division managers may differ in their attitudes toward the changes that top managers propose and, if their interests and power seem threatened, will resist those changes

How to overcome resistance to change

Education and communication Participation Building support and commitment Developing positive relationships Implementing changes fairly Selecting people who accept change

ESOP's

Employee stock ownership plans distribute company stock to employees as a form of profit sharing -form of reward

Control systems

Formal target-setting, monitoring, evaluation, and feedback systems that provide managers with information about how well the organization's strategy and structure are working.

The importance of organizational control

Helps managers obtain competitive advantage: Efficiency: Control systems accurately measure input/ output units that indicate how efficient production strategies are. Without a control system in place, managers have no idea how well their organization is performing and how its performance can be improved— information that is becoming increasingly important in today's highly competitive environment. Quality: Effective managers create a control system that consistently monitors the quality of goods and services so they can continuously improve quality Responsiveness: Control systems that evaluate how well customer-contact employees perform their job. -Incentivizes workers to be consistent b/c they know they are being monitored. -Reveals areas in which skill training/ new procedures can help employees Innovation: Appropriate control systems to encourage risk taking and empower employees -offer promotions and rewards based on superior performance

Step 3: Compare actual performance against chosen standards of performance

If performance= higher than expected, managers might decide they set performance standards too low and may raise them for the next period to challenge their subordinates if performance= too low and standards were not reached, or if standards were set so high that employees could not achieve them, managers must decide whether to take corrective action. if corrective action is needed, step 4 is necessary

feedforward control

Input stage: control that allows managers to anticipate problems before they arise development of mgmt info systems promote feedforward control (gives info about task and general environment) EX: giving strict product specifications to suppliers in advance (a form of performance target), orgs can control the quality of the inputs it receives from its suppliers --> thus avoid potential problems during the conversion process.

cost/expense budget approach

Large organizations often treat each division as a singular or stand-alone responsibility center. Corporate managers then evaluate each division's contribution to corporate performance. Managers of a division may be given a fixed budget for resources and be evaluated on the amount of goods or services they can produce using those resources

Profit Budget Approach

Managers are evaluated for their ability to maximize profits from the sales of goods and services that are produced

Revenue Budget Approach

Managers are evaluated for their ability to maximize revenues from the sales of goods and services that are produced

MBO (management by objectives) in empowered/ cross functional teams

Managers ask each team to develop a set of goals and performance targets that the team hopes to achieve—goals that are consistent with organizational objectives. Managers then negotiate with each team to establish its final goals and the budget the team will need to achieve them. The reward system is linked to team performance, not to the performance of any one team member.

Organizational change

Movement of an organization away from its present state and toward some desired future state to increase its efficiency and effectiveness

problems with bureaucratic control

Not compatible with innovative culture Organizations tend to become overly bureaucratic over time as managers do everything according to the rule book. --> decision making slows and managers react slowly to changing conditions. people become so used to automatically following rules that they stop thinking for themselves --> reduce the level of learning taking place in an organization and get the organization off track if managers and workers focus on the wrong issues.

Types of Control Systems & their control mechanisms to assess performance

Output Control: financial measures of performance, org goals, op budgets Behavior Control: direct supervision, management by objectives, rules/standard op procedures Organizational Culture/ Clan Control: values, norms, socialization

feedback control

Output stage: control that gives managers information about customers' reactions to goods and services so corrective action can be taken if necessary. EX: control system that monitors the number of customer returns alerts managers when defective products are being produced

Internal Entrepreneurship

Prevents the departure of talented people -many frustrated intrepreneurs become entrepreneurs

Organizational Control Process

Step 1: Establish the standards of performance, goals, or targets against which performance is to be evaluated. Step 2: Measure Actual Performance Step 3: Compare actual performance against chosen standards of performance Step 4: Evaluate the result and initiate corrective action if the standard is not being achieved

The best goals are

Stretch goals: specific, difficult goals that challenge and stretch managers' ability but are not out of reach and do not require an impossibly high expenditure of managerial time and energy -successful assessment leads to challenging, interrelated goals that energize the org. must assess how: 1. difficult a certain task is 2. the ability of a particular subordinate manager to achieve the goal.

Step 1: Establish the standards of performance, goals, or targets against which performance is to be evaluated.

The standards of performance that managers select measure: efficiency, quality, responsiveness to customers, and innovation -# of standards can be in the hundreds of thousands -performance standards selected at one level affect those at other levels Managers at each level are responsible 4 selecting standards that will best evaluate how well their division is performing (be careful to focus on just one standard) Ex: A low-cost strategy measures efficiency. Top managers set goal to reduce op costs by 10%. C- mngrs evaluate divisional mngrs on ability to reduce operating costs within their respective divisions, and divisional mngrs set cost- saving targets for functional mngrs.

inert cultures

Those that lead to values and norms that fail to motivate or inspire employees Lead to stagnation and often failure over time poor working relationships frequently develop between the organization and its employees, and instrumental values of noncooperation, laziness, and loafing and work norms of output restriction are common.

top-down change

Top managers identify the need for change, decide what to do, and then move quickly to implement the changes throughout the organization. the emphasis is on making the changes quickly and dealing with problems as they arise; it is revolutionary in nature. EX: top managers may decide to restructure and downsize the organization and then give divisional and departmental managers specific goals to achieve.

An estimated 50% of small businesses fail in the first three to five years. By some estimates 38% of men and 50% of women in today's workforce want to start their own companies.

True

organizational control

When managers make choices about how to influence and shape employees' behavior and performance

Management by Objectives (MBO)

a formal system of evaluating subs on their ability to achieve specific organizational goals/ performance standards and to meet operating budgets. Most orgs use forms of MBO systems bc: 1. pointless to establish goals and then fail to evaluate if they are being achieved 2. participatory nature with subs 3. linked rewards motivate Step 1: Specific goals and objectives are established at each level of the organization -top mgmt establishes overall org objectives, then objective setting cascades down hierarchy as divisional lvl mngrs set goals to achieve corp obj. then first lvl mngrs and employees jointly set goals that achieve functional obj. Step 2: Managers and their subordinates together determine the subordinates' goals -discuss feasible goals and bargain over the needed budget to achieve goals Step 3:Managers and their subordinates periodically review the subordinates' progress toward meeting goals: -salary raises/ promos are linked to goal setting process: managers who achieve goals recieve greater rewards than those who fall short

Bottom-up change

a gradual or evolutionary approach to change in which managers at all levels work together to develop a detailed plan for change over time, managers at all levels work to develop a detailed plan for change

Adaptive Culture

an organizational culture that encourages confidence and risk taking among employees, has leadership that produces change, and focuses on the changing needs of customers -emphasis on entrepreneurship companies that invest in their employees & emphasize the long term nature of the employment relationship/ try to avoid layoffs -invest heavily in training and development -develop long term career paths -rewards are linked to performance (ESOPS)

Major advantage of bottom up change

can co-opt resistance to change from employ- ees. Because the emphasis in bottom-up change is on participation and on keeping people informed about what is going on, uncertainty and resistance are minimized

Evaluating the change

compare pre-change performance with post-change performance -changes in market share, in profits, or in the ability of managers to meet their goals use benchmarking

Inventory Turnover Ratio

cost of goods sold/average inventory measures how efficiently managers are turning inventory over so excess inventory is not carried

Days Sales Outstanding

current accounts receivable/sales for period divided by days in period reveals how efficiently managers are collecting revenue from customers to pay expenses

Why is it important for subordinates to participate in goal setting?

doing so enables them to tell managers what they think they can realistically achieve strengthens commitment to achieving goals/meeting budgets

4 building blocks of competitive advantage

efficiency, quality, innovation, responsiveness to customers

intrapreneurs

employees of existing organizations who notice opportunities for product or service improvements and are responsible for managing the development process

Rules and SOPs

guide behavior and specify what employees are to do when they confront a problem that needs a solution.

An organization is highly leveraged if..

it uses more debt than equity. Debt=risky when net profit fails to cover the interest on the debt ex: when paychecks are not sufficient enough to pay off their credit cards.

behavior control

keep subordinates on track and make organizational structures work as they are designed to work: direct supervision management by objectives rules and standard operating procedures.

standardized behavior

leads to standardized outputs --> actions are performed the same way and predictable outcomes, when employees follow the rules that managers have developed, no need to monitor behavior output

Step 4: Evaluate the result and initiate corrective action if the standard is not being achieved

learning takes place here! if level of performance is unacceptable, change how work activities are performed if something in the situational environment is causing the issue, change how resources are utilized

Direct supervision

managers actively monitor subordinate behavior, teach subordinates appropriate and inappropriate behaviors, and intervene to take corrective action as needed. -The most immediate and potent form of behavior control Leadership: lead by example allows managers to become personally involved with their subordinates and mentor subordinates/ develop their management skills

Step 2: Measure Actual Performance

managers can measure or evaluate two things: 1 output control -easier to measure than behavior b/c tangible 2 behavioral control -do employees come to work on time -do employees consistently follow established rules the more nonroutine or complex organizational activities are, the harder it is for managers to measure outputs or behavior. types/uses of behavior and output control differ at different org levels

If goals are set at an impossibly high level..

managers might work only half-heartedly to achieve them because they are certain they will fail.

controlling

managers monitor and evaluate: 1. how efficiently/ effectively an organization and its members are performing the activities necessary to achieve organizational goals 2. whether the organization's strategy and structure are: -working as intended - how they could be improved - how they might be changed if they are not working

Financial Measures of Performance

objectivity is why managers use them! informs managers about results already made, not how to find new opportunities for competitive advantage profit ratios: measure how efficiently managers are using the organization's resources to generate profits. -ROI and operating margin liquidity ratios: measure how well managers have protected organizational resources to be able to meet short-term obligations. - current and quick ratios leverage ratios: measure the degree to which managers use debt (borrow money) or equity (issue new shares) to finance ongoing operations. - debt to assets and times covered ratio activity ratios: show how well managers are creating value from organizational assets. -inventory turnover and days sales outstanding

Entrepreneurs

people who notice opportunities and take responsibility for mobilizing the resources necessary to produce new and improved goods and services -bring about change to companies and industries b/c they see new and improved ways to use resources to create products customers will want to buy

Benchmarking

process of comparing one company's performance on specific dimensions with the performance of other, high-performing organizations.

clan control

the control exerted on individuals and groups in an organization by shared values, norms, standards of behavior, and expectations employees internalize org values/norms & then let these values and norms guide their decisions and actions managers can deliberately try to influence the kind of values and norms that develop in an organization by specifying appropriate/inappropriate behaviors

Managing by exception

the process of looking only for employees who were falling behind in meeting their goals when employees fall short, manager calls employees not to scold them but to ask whether there was anything he could do to help them get the job done. allows managers to exercise control over the organization without resorting to expensive layers of a management hierarchy and direct supervision

organizational learning

the process through which managers try to increase organizational members' abilities to understand and appropriately respond to changing conditions -helps for org change

organizational culture

the shared set of beliefs, expectations, values, norms, and work routines that influences how members of an organization relate to one another and work together to achieve organizational goals

if goals are set too low...

they are too easy to achieve. managers will not be motivated to use all their resources as efficiently and effectively as possible.

highest performing organizations

those that are constantly changing managers are attuned to the need to continually modify the way they operate and adopt techniques like empowered work groups and teams, benchmarking, and global outsourcing to remain competitive in a global world. -become experienced at doing so. in their search to become more efficient and effective. EX: Toyota, and Walmart are constantly changing the mix of their activities to move forward even as they seek to make their existing operations more efficient.

purpose of organizational control

to provide managers with ... 1. a means of directing/ motivating subordinates to work toward achieving organizational goals 2. specific feedback on how well an organization and its members are performing

future-oriented approach

top managers must establish organizational goals that encourage middle and first-line managers to achieve comp advantage (superior efficiency, quality, innovation, and responsiveness to customers)

Operating Margin Ratio

total op profit/ sales revs measure of how much % profit a company is earning on sales -successful attempts to reduce costs are reflected here -can compare one years performance to another - the higher the %, the better a company is using its resources to make and sell the product.

When to use strong organizational culture as a source of control?

when personal supervision is of little use when rules cannot be developed to tell employees what to do when outputs and goals cannot be measured at all or can be measured usefully only over long periods EX:A manager cannot evaluate the performance of workers such as doctors, research scientists, or engineers by observing their behavior on a day-to-day basis