Principles of Management - Ch 16: Control

Control isn't Always Worthwhile or Possible (16-1f)

-Control loss: the situation in which behavior and work procedures do not conform to standards. Maintaining control is important because control loss prevents organizations from achieving their goals. When control loss occurs, managers need to find out what, if anything, they could have done to prevent it. To determine whether control is worthwhile... managers need to carefully access... -Regulation costs: the costs associated with implementing or maintaining control. If a control process costs more than it benefits, it may not be worthwhile. Another factor to consider is... -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.

What to Control (16-3 heading)

...

Calculating Economic Value Added (EVA) (16-3b)

1. Calculate net operating profit after taxes (NOPAT) E.g. $3,500,000 2. Identify how much capital that company has invested (that is spent) E.g. $16,800,000 3. Determine the cost (that is, rate) paid for capital (usually between 5 and 8%) E.g. 10% 4. Multiply capital used (step 2) times cost of capital (step 3) E.g. (10% * $16,800,000) = $1,680,000 5. Subtract the total dollar cost of capital from net profit after taxes E.g. $3,500,000 (NOPAT) - $1,680,000 (Total cost of capital) -------------- $1,820,000 (EVA)

Three Strategies for Waste Prevention and Reduction

1. Good housekeeping: Perform regularly scheduled preventive maintenance for offices, plants, and equipment. 2. Material/product substitution: Replace toxic or hazardous materials with less harmful materials. 3. Process modification: Change inefficient steps or procedures to eliminate or reduce waste.

Control Methods (16-2 heading)

5 different control methods

Concurrent control (16-1e)

Addresses the problems inherent in feedback control a mechanism for gathering information about performance deficiencies as they occur, thereby eliminating or shortening the delay between performance and feedback Thus, it is an improvement over feedback because it attempts to eliminate or shorten the delay between performance and feedback about the performance.

Continued (16-3e)

At the second level of sustainability, recycle and reuse, wastes are reduced by reusing materials as long as possible or by collecting materials for on- or off-site recycling. A growing trend in recycling is design for disassembly, where products are designed from the start for easy disassembly, recycling, and reuse after they are no longer usable. At the third level of sustainability, waste treatment, companies use biological, chemical, or other processes to turn potentially harmful waste into harmless compounds or useful by products. The fourth and lowest level of sustainability is waste disposal. Wastes that cannot be prevented, reduce, recycled, reused, or treated should be safely disposed of in processing plants or in environmentally secure landfills that prevent leakage and contamination of soil and underground water supplies.

Concertive Control (16-2d)

Based on beliefs that are shaped and negotiated by workgroups. the regulation of workers' behavior and decisions through workgroup values and beliefs Concertive controls usually arise when companies give workgroups complete autonomy and responsibility for task completion. The most autonomous groups operate without managers and are completely responsible for controlling workgroup processes, outputs, and behavior. Such groups do their own hiring, firing, worker discipline, scheduling, materials ordering, budget making and meeting, and decision-making. Concertive control is not established overnight. Highly autonomous work groups evolve through two phases as they develop concertive control. In phase one, group members learn to work with each other, supervise each other's work, and develop the values and beliefs that will guide and control their behavior. And because they develop these values and beliefs themselves, workgroup members feel strongly about following them. The second phase in the development of concertive control is the emergence and formalization of objective rules to guide and control behavior. The beliefs and values developed in phase one usually develop into more objective rules as new members join teams. The clearer those rules, the easier it becomes for new members to figure out how and how not to behave. Ironically, concertive control may lead to even more stress for workers to conform to expectations than bureaucratic control. 1. Have to worry about an entire team observing what you're doing rather than just your boss. 2. Making sure not only you, but also your team members are being effective and adhering to team values and rules.

Continued (16-3b)

By themselves, none of these tools - cash flow analyses, balance sheets, income statements, financial ratios, or budgets - tell the whole financial story of a business. They must be used together when assessing a company's financial performance. Accounting research also indicates that the complexity and sheer amount of information contained in these accounting tools can shut down the brain and glaze over the eyes of even the most experienced manager. Sometimes there's simply too much information to make sense of.

Dynamic, Cybernetic Process (16-1d)

Control is a continuous, dynamic, cybernetic process. Control begins by: -Set standards (guidelines the organization sets) -Measure performance (how people are doing) -Compare performance -Identify deviations from the standards -Analyzing deviations (the positive and negative ones) -Develop and implement a program for corrective action to get people back on track If the performance deviates from the standards, then managers and employees analyze the deviations and develop and implement corrective programs that (they hope) achieve the desired performance by meeting the standards. Cybernetic: the process of steering or keeping on course

The Control Process (16-1 heading)

Control: a regulatory process of establishing standards to achieve organizational goals, comparing actual performance against the standards and taking corrective action when necessary. Control is achieved when behavior and work procedures conform to standards and when company goals are accomplished. Control is not just an after-the-fact process, however. Preventive measures are also a form of control.

Objective Control (16-2b)

In many companies, bureaucratic control has evolved into objective control. However, bureaucratic control focuses on whether policies and rules are followed, objective control focuses on observing and measuring worker behavior or output. the use of observable measures of worker behavior or outputs to assess performance and influence behavior There are two kinds of objective control: behavior control and output control. Behavior control: the regulation of the behaviors and actions that workers perform on the job. The basic assumption of behavior control is that if you do the right things (ii.e., the right behaviors) every day, then those things should lead to goal achievement. Instead of measuring what managers and workers do, output control measures the results of their efforts. Output control: the regulation of workers' results or outputs through rewards and incentives. It gives managers and workers the freedom to behave as they see fit as long as they accomplish prespecified, measurable results. Output control is often coupled with rewards and incentives. These things must occur for output control to lead to improved business results. First, output control measures must be reliable, fair, and accurate. Second, employees and managers must believe that they can produce the desired results. If they don't then the output controls won't affect their behavior. Third, the rewards or incentives tied to output control measures must truly be dependent on achieving established standards of performance. Common forms of output control measures include production levels in manufacturing, sales, customer satisfaction, and on-time performance (deliveries, arlines, and trucking, for example).

The Balanced Scorecard (16-3a)

Most companies measure performance using standard financial and accounting measures such as return on capital, return on assets, return on investments, cash flow, net income, and net margins. measurement of organizational performance in four equally important areas: finances, customers, internal operations, and innovation and learning Encourages managers to look beyond such traditional financial measures to four different perspectives on company performance. How do customers see us (the customer perspective)? At what must we excel (the the internal perspective)? Can we continue to improve and create value (the innovation and learning perspective)? How do we look to shareholders (the financial perspective)? The balanced scorecard has several advantages over traditional control processes that rely solely on financial measures. 1. It forces managers at each level of the company to set specific goals and measure performance in each of the four areas. 2. The second major advantage of the balanced scorecard approach is that it minimizes the chances for suboptimization, which occurs when performance improves in one area at the expense of decreased performance in others. The four basic parts of the balanced scorecard will be discussed in 16-3b through 16-3e.

Normative Control (16-2c)

Rather than monitoring rules, behaviors, or output, another way to control what goes on in organizations is to use normative control to shape the beliefs and values of the people who work there. the regulation of workers' behavior and decisions through widely shared organizational values and beliefs Normative controls are created in two ways. First, companies that use normative controls are very careful about whom they hire. While many companies screen potential applicants on the basis of their abilities, normatively controlled companies are just as likely to screen potential applicants based on their attitudes and values. Second, with normative controls, managers and employees learn what they should and should not do by observing experienced employees and by listening to the stories they tell about the company. For normative controls to work, however, managers must not only select only the right people, they must reward employees who honor those attitudes and values, and deal with those who don't.

Standards (16-1a)

The control process begins when managers set goals such as satisfying 90 percent of customers or increasing sales by 5 percent. Companies then specify the performance standards that must be met to accomplish these goals. a basis of comparison for measuring the extent to which various kinds of organizational performance are satisfactory or unsatisfactory The first criterion for a good standard is that it must enable goal achievement. If you're meeting the standard but still not achieving company goals, then the standard may have to be changed. Companies also determine standards by listening to customers' comments, complaints, and suggestions or by observing competitors. Standards can also be determined by benchmarking (the process of identifying outstanding practices, processes, and standards in other companies and adapting them to your company) When setting standards by benchmarking, the first step is to determine what to benchmark. Organizations can benchmark anything from cycle time (how fast) to quality (how well) to price (how much). After setting standards, the next step is to identify the companies against which to benchmark those standards. The last step is to collect data to determine other companies' performance standards.

The Innovation and Learning Perspective: Sustainability (16-3e)

The last part of the balanced scorecard, the innovation and learning perspective, addresses the question, "Can we continue to improve and create value?" Thus, the innovation and learning perspective involves continuous improvement in ongoing products and services (discussed in Chapter 18), as well as relearning and redesigning the processes by which products and services are created (discussed in Chapter 7). The goals of the top-level, waste prevention and reduction, are to prevent waste and pollution before they occur or to reduce them when they do occur.

Comparison to Standards (16-1b)

The next step in the control process is to compare actual performance to performance standards. Although this sounds straightforward, the quality of the comparison depends largely on the measurement and information systems a company uses to keep track of performance. The better the system, the easier it is for companies to track their progress and identify problems that need to be fixed.

Corrective Action (16-1c)

The next step in the control process is to identify performance deviations, analyze those decisions, and then develop and implement programs to correct them. This is similar to the planning process discussed in Chapter 5. Regular, frequent performance feedback allows workers and managers to track their performance and make adjustments in effort, direction, and strategies.

The Customer Perspective: Controlling Customer Defections (16-3c)

The second aspect of organizational performance that the balanced scorecard helps managers monitor is customers. Customer defections: a performance assessment in which companies identify which customers are leaving and measure that rate at which they are leaving Because most accounting systems measure the financial impact of a customer's current activity (sales), rather than the lifetime value of each customer, few managers realize the financial impact that even a low rate of customer defection can have on a business. Beyond the clear benefits to the bottom line (being able to increase annual profits by 25-100 percent from retaining just 5 percent more customers per year), the second reason to study customer defections is that customers who have left are much more likely than current customers to tell you what you are doing wrong.

The Internal Perspective: Controlling Quality (16-3d)

The third part of the balance scorecard, the internal perspective, consists of the processes, decisions, and actions that managers and workers make within the organization. The internal perspective focuses on internal processes and systems that add value to the organization. E.g. For McDonald's, it could be processes and systems that enable the company to provide consistent, quick, low-cost food. Yet, no matter what area a company chooses, the key is to excel in that area. Quality is typically defined and measured in three ways: excellence, value, and conformance to expectations. - When the company defines its quality goal as excellence, managers must try to produce a product or service of unsurpassed performance and features. - Value is the customer perception that the product quality is excellent for the price offered. At a higher price, for example, customers may perceive the product to be less of a value. When a company emphasizes value as its quality goal, managers must simultaneously control excellence, price, durability, and any other features of a product or service that customers strongly associate with value. - When a company defines its quality goal as conformance to specifications, employees must base decisions and actions on whether services and products measure up to the standard. In contrast to excellence and value-based definitions of quality that can be somewhat ambiguous, measuring whether products and services are "in spec" is relatively easy. Furthermore, while conformance to specifications is usually associated with manufacturing, it can be used equally well to control quality in manufacturing industries like supermarkets.

The Financial Perspective: Controlling Budgets, Cash Flows, and Economic Value Added (16-3b heading)

The traditional approach to controlling financial performance focuses on accounting tools such as cash flow analysis, balance sheets, income statements, financial ratios, and budgets.

Bureaucratic Control (16-2a)

When most people think of managerial control, what they have in mind is bureaucratic control. the use of hierarchical authority to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures Another characteristic of bureaucratically controlled companies is that, due to their rule- and policy-driven decision-making, they are highly resistant to change and slow to respond to customers and competitors. Why does bureaucracy persist? Despite significant disadvantages, "...it works, at least to a degree. With its clear lines of authority, specialized units, and standardized tasks, bureaucracy facilitates efficiency at scale".

Zero-based budgeting (16-3b)

a budgeting technique that requires managers to justify every expenditure every year

Self-control (self-management) (16-2e)

a control system in which managers and workers control their own behavior by setting their own goals, monitoring their own progress, and rewarding themselves for goal achievement Self-control does not result in anarchy, in which everyone gets to do whatever he or she wants. In self-control, or self-management, leaders and managers provide workers with clear boundaries within which they may guide and control their own goals and behaviors. Leaders and managers also contribute to self-control by teaching others the skills they need to maximize and monitor their own work effectiveness.

Feedback control (16-1e)

a mechanism for gathering information about performance deficiencies after they occur this information is then used to correct or prevent performance deficiencies. Study after study has clearly shown that feedback improves both individual and organizational performance. In most instances, any feedback is better than no feedback. If feedback has a downside, it's that feedback always comes after the fact.

Feedforward control (16-1e)

a mechanism for monitoring performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur In contrast to feedback and concurrent control, which provide feedback on the basis of outcomes and results, feed-forward control provides information about performance deficiencies by monitoring inputs rather than inputs. Thus, feedforward control seeks to prevent or minimize performance deficiencies before they happen.

Cash flow analysis (16-3b)

a type of analysis that predicts how changes in a business will affect its ability to take in more cash than it pays out

Balance sheets (16-3b)

accounting statements that provide a snapshot of a company's financial position at a particular time

Income statements (16-3b)

accounting statements, also called "profit and loss statements," that show what has happened to an organization's income, expenses, and net profit over a period of time

Financial ratios (16-3b)

calculations typically used to track a business's liquidity (cash), efficiency, and profitability over time compared to other businesses in its industry

Budgets (16-3b)

quantitative plans through which managers decide how to allocate available money to best accomplish company goals

Economic Value Added (EVA) (16-3b)

the amount by which company profits (revenues, minus expenses, minus taxes) exceed the cost of capital in a given year It is based on the simple idea that capital is necessary to run a business and that capital comes at a cost. Although most people think of capital as cash, after it is invested (i.e., spent), capital is more likely to be found in a business in the form of computers, manufacturing plants, employees, raw materials, and so forth. The most common costs of capital are the interest paid on long-term bank loans used to buy all those resources, the interest paid to bondholders (who lend organizations their money), and the dividends (cash payments) and growth in stock value that accrue to shareholders. EVA is so important because... 1. Because it includes the cost of capital, it shows whether a business, division, department, profit center, or product is really paying for itself. 2. Because EVA can be easily be determined for subsets of a company such as divisions, regional offices, manufacturing plants, and sometimes even departments, it makes managers and workers at all levels pay much closer attention to their segment of the business. The more that EVA exceeds the total dollar cost of capital, the better a company has used investors' money that year.

Feedback, Concurrent, and Feedforward Control (16-1e)

three basic control methods