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7AInternational Quality Standards One impetus for TQM in the United States is the increasing significance of the global economy. Many countries have adopted a universal benchmark for quality management practices, ISO 9000 standards, which represent an international consensus of what constitutes effective quality management as outlined by the International Organization for Standardization (ISO) in Geneva, Switzerland. Hundreds of thousands of organizations in 157 countries, including the United States, have been certified against ISO 9000 standards to demonstrate their commitment to quality. Europe continues to lead in the total number of certifications, but the greatest number of new certifications in recent years has been in the United States. One of the more interesting organizations to become ISO certified was the Phoenix, Arizona, police department's Records and Information Bureau. In today's environment, where the credibility of law enforcement agencies has been called into question, the bureau wanted to make a clear statement about its commitment to the high quality and accuracy of information provided to law enforcement personnel and the public. ISO certification has become the recognized standard for evaluating and comparing companies on a global basis, and more U.S. companies are feeling the pressure to participate to remain competitive in international markets. In addition, many countries and companies require ISO certification before they will do business with an organization. Concept Connection Caro/Alamy Stock Photo In order to become ISO 9000-certified, companies have to work with an independent registrar that will audit the company's practices and procedures according to the certification guidelines. Cleveland HeartLab Inc., for example, worked with the ISO to earn its certification. Cleveland HeartLab makes medical information management systems for testing and storing data about heart patients.

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7Trends in Quality and Financial Control Many companies are responding to changing economic realities and global competition by reassessing organizational management and processes—including control mechanisms. Two major trends are international quality standards and the use of electronic monitoring.

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A current approach to organizational control is to take a balanced perspective on company performance, integrating various dimensions of control that focus on markets and customers, as well as employees and financials. Managers recognize that relying exclusively on financial measures can result in short-term, dysfunctional behavior. Nonfinancial measures provide a healthy supplement to the traditional financial measures, and companies are investing significant sums in developing more balanced measurement systems as a result. The balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company's critical success factors. A balanced scorecard contains four major perspectives, as illustrated in Exhibit 19.2: financial performance, customer service, internal business processes, and the organization's capacity for learning and growth. Within these four areas, managers identify key performance metrics the organization will track: Financial performance. The financial performance perspective reflects a concern that the organization's activities contribute to improving short- and long-term financial performance. It includes traditional measures such as net income and return on investment. Customer service. Customer service indicators measure information such as how customers view the organization and customer retention and satisfaction. These data may be collected in many forms, including testimonials from customers describing superlative service or from customer surveys. The Internal Revenue Service (IRS) became embroiled in a controversy that suggests poor attention to customer service. As a part of the government that many people already loathe, the IRS opened itself to scathing attack by selecting certain groups applying for tax-exempt status for extra scrutiny. The initial impression was that the IRS was targeting only conservative "tea party" organizations, but subsequent investigation revealed they were looking at both left- and right-leaning groups. The scandal particularly tarnished the image of the IRS's tax-exempt unit, which one critic described as "a bureaucratic mess, with some employees ignorant about tax laws, defiant of their supervisors, and blind to the appearance of impropriety." Internal business processes. Business process indicators focus on production and operating statistics. For an airline, business process indicators may include on-time arrivals and adherence to safety guidelines. An event at Reagan National Airport in Washington, D.C., reflected weak adherence to safety standards, for instance. When a lone air traffic controller at this airport fell asleep while on duty and failed to respond to repeated radio transmissions, two pilots waiting to land jets carrying a total of 160 people decided to land without clearance, violating Federal Aviation Administration (FAA) safety regulations and damaging the reputations of both airlines involved, as well as the airport. Potential for learning and growth. The final component of the balanced scorecard looks at the organization's potential for learning and growth, focusing on how well resources and human capital are being managed for the company's future. Metrics may include things such as employee retention and the introduction of new products. The components of the scorecard are designed in an integrative manner, as illustrated in Exhibit 19.2. Exhibit 19.2 The Balanced Scorecard SOURCES: Based on Robert S. Kaplan and David P. Norton, "Using the Balanced Scorecard as a Strategic Management System," Harvard Business Review (January-February 1996): 75-85; and Chee W. Chow, Kamal M. Haddad, and James E. Williamson, "Applying the Balanced Scorecard to Small Companies," Management Accounting 79, no. 2 (August 1997): 21-27. Managers record, analyze, and discuss these various metrics to determine how well the organization is achieving its strategic goals. The balanced scorecard is an effective tool for managing and improving performance, but only if it is clearly linked to a well-defined organizational strategy and goals. At its best, use of the scorecard cascades down from the top levels of the organization so that everyone becomes involved in thinking about and discussing strategy. The scorecard has become the core management control system for many well-known organizations, such as Bell Emergis (a division of Bell Canada), Exxon Mobil Corporation, CIGNA (insurance), Hilton Hotels, and even some units of the U.S. federal government. As with all management systems, the balanced scorecard is not right for every organization in every situation. The simplicity of the system causes some managers to underestimate the time and commitment that is needed for the approach to become a truly useful management control system. If managers implement the balanced scorecard using a performance measurement orientation rather than a performance management approach that links targets and measurements to corporate strategy, use of the scorecard can actually hinder or even decrease organizational performance

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Capital Budget The capital budget lists planned investments in major assets such as buildings, heavy machinery, or complex information technology systems, often involving expenditures over more than a year. Capital expenditures not only have a large impact on future expenses, but they also are investments designed to enhance profits. Therefore, a capital budget is necessary to plan the impact of these expenditures on cash flow and profitability. Controlling involves not only monitoring the amount of capital expenditures, but also evaluating whether the assumptions made about the return on the investments are holding true. Managers can evaluate whether continuing investment in particular projects is advisable, as well as whether their procedures for making capital expenditure decisions are adequate. Some companies, including Boeing, Merck, Shell, United Technologies, and Whirlpool, evaluate capital projects at several stages to determine whether they are still in line with the company's strategy

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Cash Budget The cash budget estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organization has sufficient cash to meet its obligations. The cash budget shows the level of funds flowing through the organization and the nature of cash disbursements. If the cash budget shows that the firm has more cash than necessary to meet short-term needs, the company can arrange to invest the excess to earn interest income. In contrast, if the cash budget shows a payroll expenditure of $40,000 coming at the end of the week but only $30,000 in the bank, the organization must borrow cash to meet the payroll.

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Feedback Control Model Teams of researchers asked managers in thousands of organizations questions designed to determine how well they were implementing various management control practices, such as establishing standards and targets and measuring performance data, and they found that better control is strongly correlated with better organizational productivity and performance. A feedback control model can help managers meet strategic goals by monitoring and regulating the organization's activities and using feedback to determine whether performance meets established standards.

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Financial Analysis: Interpreting the Numbers A manager needs to be able to evaluate financial reports that compare the organization's performance with earlier data or industry norms. These comparisons enable the manager to see whether the organization is improving and whether it is competitive with others in the industry. The most common financial analysis focuses on ratios, statistics that express the relationships between performance indicators such as profits and assets, sales, and inventory. Ratios are stated as a fraction or proportion; Exhibit 19.8 summarizes some financial ratios, which are measures of an organization's liquidity, activity, profitability, and leverage. These ratios are among the most common, but many measures are used. Managers decide which ratios reveal the most important relationships for their business. Exhibit 19.8Common Financial Ratios Liquidity Ratios Current ratio Quick ratio Current assets/Current liabilities Cash + Accounts receivable/Current liabilities Activity Ratios Inventory turnover Conversion ratio Total sales/Average inventory Purchase orders/Customer inquiries Profitability Ratios Profit margin on sales Gross margin Return on assets (ROA) Net income/Sales Gross income/Sales Net income/Total assets Leverage Ratios Debt ratio Total debt/Total assets Liquidity Ratios The liquidity ratio indicates an organization's ability to meet its current debt obligations. For example, the current ratio (current assets divided by current liabilities) tells whether the company has sufficient assets to convert into cash to pay off its debts, if needed. If a hypothetical company, Oceanographics, Inc., has current assets of $600,000 and current liabilities of $250,000, the current ratio is 2.4, meaning it has sufficient funds to pay off immediate debts 2.4 times. This level for the current ratio is normally considered a satisfactory margin of safety. Another liquidity ratio is the quick ratio, which is typically expressed as cash plus accounts receivable divided by current liabilities. The quick ratio is a popular metric to pair with the current ratio to gauge liquidity. "If a business does not have decent liquidity, then one unexpected expense could severely hurt it," said Brad Schaefer, an analyst with Sageworks Inc., a financial information company. Activity Ratios The activity ratio measures internal performance with respect to key activities defined by management. For example, inventory turnover is calculated by dividing total sales by average inventory. This ratio tells how many times the inventory is used up to meet the total sales figure. If inventory sits too long, money is wasted. Dell Inc. achieved a strategic advantage by minimizing its inventory costs. Dividing Dell's annual sales by its small inventory generates an inventory turnover rate of 35.7. Another type of activity ratio, the conversion ratio, is purchase orders divided by customer inquiries. This ratio is an indicator of a company's effectiveness in converting inquiries into sales. For example, if Cisco Systems moves from a 26.5 to a 28.2 conversion ratio, more of its inquiries are turned into sales, indicating better sales activity. Profitability Ratios Managers analyze a company's profits by studying profitability ratios, which state profits relative to a source of profits, such as sales or assets. When Alan Mulally became CEO of Ford Motor Company in 2008, he emphatically stressed the importance of profitability. At that time, Ford was a sick company, losing $83 million a day, and the stock price had plummeted to $1.01. Mulally initiated Ford's remarkable turnaround by fostering a new culture of accountability that emphasized the use of consistent metrics to gauge performance. Mulally expected each department head to know and report on how his or her department was performing. His emphasis on data-driven management permanently changed the culture at Ford. In 2010, Ford posted a profit of $6.6 billion, the most money that the company had made in more than a decade. Concept Connection istockphoto.com/Agnieszka Gaul Research and development of drugs and treatments is a huge expense for pharmaceutical companies, so many managers have implemented zero-based budgeting in their R&D to improve financial performance. "It really forces you to ask yourself, do you need to spend this," says former Valeant Pharmaceuticals CFO Howard Schiller. "When people have to explain it, and justify it, you often get to a different answer." One important profitability ratio is the profit margin on sales, which is calculated as net income divided by sales. Similarly, gross margin is the gross (before-tax) profit divided by total sales. Another profitability measure is return on assets (ROA), which is a percentage representing what a company earned from its assets, computed as net income divided by total assets. ROA is a valuable yardstick for comparing a company's ability to generate earnings with other investment opportunities. In basic terms, the company should be able to earn more by using its assets to operate the business than it could by putting the same investment in the bank. Leverage Ratios Leverage refers to funding activities with borrowed money. A company can use leverage to make its assets produce more than they could on their own. However, too much borrowing can put the organization at risk for being unable to keep up with repayment of its debt. Managers therefore track their debt ratio, or total debt divided by total assets, to make sure it does not exceed a level that they consider acceptable. Lenders may consider a company with a debt ratio above 1.0 to be a poor credit risk. Remember This Financial statements provide the basic information used for financial control of an organization. The balance sheet shows the firm's financial position with respect to assets and liabilities at a specific point in time. The income statement summarizes the firm's financial performance for a given time interval. The most common financial analysis focuses on the use of ratios—statistics that express the relationships between performance indicators such as profits and assets, sales, and inventory. The liquidity ratio indicates the organization's ability to meet its current debt obligations. The activity ratio measures the organization's internal performance with respect to key activities defined by management. The profitability ratio describes the firm's profits relative to a source of profits, such as sales or assets.

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Financial Control "Numbers run companies," claims Norm Brodsky, a veteran entrepreneur and writer for Inc. magazine. In every organization, managers need to watch how well the organization is performing financially by watching the numbers. Not only do the numbers tell whether the organization is on sound financial footing, but they also can be useful indicators of other kinds of performance problems. For example, a sales decline may signal problems with products, customer service, or sales force effectiveness.

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Debbie Dusenberry was following her dream as a successful entrepreneur. She had opened a beautifully designed store called Curious Sofa and filled its expansive showroom with antiques, offbeat furniture, accessories, and gifts. She had a dedicated staff and sales reaching $800,000 per year. She had borrowed a lot of money and was planning to expand her inventory. Business was growing fast. But Dusenberry was typical of many small business owners who are long on drive and passion but short on financial experience. Caught up in the excitement of growing sales, she was unaware that excessive costs in staffing, inventory, and freight were hurting her profitability. She was operating without a budget and not keeping track of all her expenses. When sales dropped during the economic recession, the glaring weaknesses in her financial system were exposed. Scared and exasperated, Dusenberry began thinking about how she could save her business and realized she needed a new system that would help her monitor and manage her costs. Her first step was to create a budget. Budgetary control, one of the most commonly used methods of managerial control, is the process of setting targets for an organization's expenditures, monitoring results and comparing them to the budget, and making changes as needed. As a control device, budgets are reports that list planned and actual expenditures for cash, assets, raw materials, salaries, and other resources. In addition, budget reports usually list the variance between the budgeted and actual amounts for each item. A budget is created for every division or department within an organization, no matter how small, as long as it performs a distinct project, program, or function. The fundamental unit of analysis for a budget control system is called a responsibility center. A responsibility center is defined as any organizational department or unit under the supervision of a single person who is responsible for its activity. A three-person appliance sales office in Watertown, New York, is a responsibility center, as is a quality control department, a marketing department, and an entire refrigerator manufacturing plant. The manager of each unit has budget responsibility. Top managers use budgets for the company as a whole, and middle managers traditionally focus on the budget performance of their department or division. Budgets that managers typically use include expense budgets, revenue budgets, cash budgets, and capital budgets.

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Financial Statements Financial statements provide the basic information used for financial control of an organization. Two major financial statements—the balance sheet and the income statement—are the starting points for financial control. Think of the balance sheet as a thermometer that provides a reading on the health of the business at the moment you take its temperature. The balance sheet shows the firm's financial position with respect to assets and liabilities at a specific point in time. An example of a balance sheet is presented in Exhibit 19.6. The balance sheet provides three types of information: assets, liabilities, and owners' equity. Assets are what the company owns, and they include current assets (those that can be converted into cash in a short time period) and fixed assets (such as buildings and equipment that are long term in nature). Liabilities are the firm's debts, including both current debt (obligations that will be paid by the company in the near future) and long-term debt (obligations payable over a long period of time). Owners' equity is the difference between assets and liabilities and is the company's net worth in stock and retained earnings. Exhibit 19.6 Balance Sheet The income statement, sometimes called a profit-and-loss statement or P&L for short, summarizes the firm's financial performance for a given time interval, usually one year. A sample income statement is shown in Exhibit 19.7. Some organizations calculate the income statement at three-month intervals during the year to see whether they are on target for sales and profits. The income statement shows revenues coming into the organization from all sources and subtracts all expenses, including cost of goods sold, interest, taxes, and depreciation. The bottom line indicates the net income—profit or loss—for the given time period. Exhibit 19.7 Income Statement During the recent economic recession, companies cut discretionary spending, such as travel expenses, to improve the bottom line, and managers are pushing to keep those expenses from creeping back-up. If managers keep costs low where they can, they can spend scarce dollars on higher-priority areas, such as salary increases for staff or research and development. To avoid a cost creep in travel expenses, Deloitte reminds employees of company travel policies when managers see costs rising. Employees are discouraged from traveling to meetings that are expected to last less than eight hours and to use video and Web conferencing whenever possible as an alternative to travel. The following example describes how one successful franchise owner uses a financial control system to manage one of the most profitable 7-Eleven stores in Manhattan. Manager Spotlight7-Eleven Norman Jemal, an enthusiastic and gregarious 7-Eleven franchise owner in Manhattan, loves crunching the numbers with field consultant Kunta Natapraya. Together, they study the sales data and profit margins for the thousands of snack foods that Jemal sells in his three profitable stores. Some claim that Jemal's success is because his stores are located on busy Manhattan streets. High vehicle and pedestrian traffic produce lots of potential customers. But Jemal's success also comes from his knack for analyzing financial data to spot the most profitable products in his inventory and maximizing profits through efficient ordering. When faced with reordering decisions, Jemal uses 7-Eleven's proprietary Retail Information System (RIS), which helps him analyze sales and profitability data for each product in his inventory. For example, when corporate 7-Eleven announced it was rolling out a sugar-free Slurpee Lite and an empanada, Jemal needed to make room for both by eliminating an existing product. Using RIS, he studied the profitability of each snack product and discovered that the spicy beef patty was lagging in sales and profitability, so he removed it from the stores' inventory to make room for the new products. 7-Eleven focuses on its core competence of figuring out what to sell to rushed customers and how to sell it to them. "Other franchises pitch their name," Jemal says. "7-Eleven, which I think has a great name, pitched their [RIS] system." That system is part of a carefully designed financial control model that also includes regular audits. A good audit performance will go a long way toward determining if 7-Eleven allows Jemal to open more stores. He says he'd like to open 20 more.

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Electronic Monitoring Many organizations have moved toward increased hierarchical control with the use of electronic monitoring. A survey from the American Management Association found that 66 percent of employers monitor the Internet use of their employees, 45 percent track employee keystrokes, and 43 percent monitor employee e-mail. Supermarkets can measure how long it takes a cashier to scan items, how many times she has to rescan, and how long it takes for her to initiate the next sale. Retail workers may have to clock in with a thumb scan, which prevents an employee from clocking in for a colleague who hasn't yet arrived. With today's technology, managers can keep tabs on what employees are doing practically all the time. Telematics is a term that describes technologies that wirelessly transmit data from remote sensors and GPS devices to computers for analysis. Telematics is projected to be a $30 billion industry by 2018. With the use of telematics that includes handheld delivery-information acquisition devices (DIADs) and more than 200 sensors on each delivery truck, managers at UPS can monitor a driver's speed, seat belt use, stop times, and more. UPS says telematics not only benefits the company but helps the environment as well. In one recent year, the company says telematics saved 1.7 million driving miles, 15 million minutes of idling time, and 103,000 gallons of gas. Electronic monitoring can have both positive and negative effects. By using an electronic system that assigns and monitors tasks for its warehouse workers, United Grocers, a large wholesaler, says the firm was able to cut payroll expenses by 25 percent while increasing sales by 36 percent. A study of five chain restaurants found that electronic monitoring decreased employee theft and increased hourly sales. However, too much emphasis on close monitoring can damage employee trust, create unhealthy levels of stress for employees, and hurt performance. Employee reactions to electronic monitoring are often negative, so managers should use care when implementing these systems. One UPS driver told of colleagues who found ways to get around the system, such as the driver who buckled his seat belt behind him to save time and help him meet delivery goals. "People get intimidated and they work faster," he said. "It's like when they whip animals. But this is a mental whip." Remember This As global business expands, many companies have adopted a universal benchmark for quality management practices, including ISO 9000 standards, which represent an international consensus of what constitutes effective quality management as outlined by the International Organization for Standardization (ISO). Many organizations are moving toward increased control from the top with electronic monitoring. One survey found that 66 percent of employers monitor the Internet use of their employees, 45 percent track employee keystrokes, and 43 percent monitor employee email. Telematics refers to technologies that wirelessly transmit data from remote sensors and GPS devices to computers for analysis.

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Expense Budget An expense budget includes anticipated and actual expenses for each responsibility center and for the total organization. An expense budget may show all types of expenses, or it may focus on a particular category, such as materials or research and development expenses. When actual expenses exceed budgeted amounts, the difference signals the need for managers to identify possible problems and take corrective action if needed. The difference may arise from inefficiency, or expenses may be higher because the organization's sales are growing faster than anticipated. Conversely, expenses below budget may signal exceptional efficiency or possibly the failure to meet some other standards, such as a desired level of sales or quality of service. Either way, expense budgets help identify the need for further investigation but do not substitute for it.

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Four Steps of Feedback Control Managers set up control systems that consist of the four key steps illustrated in Exhibit 19.1: establish standards, measure performance, compare performance to standards, and make corrections as necessary. Exhibit 19.1 Feedback Control Model Establish Standards of Performance Within the organization's overall strategic plan, managers define goals for organizational departments in specific, operational terms that include a standard of performance against which to compare organizational activities. At H&M retail stores, for example, sales floor employees are guided by the standard that clothes should always be "easy to find, easy to buy." Pants, sweaters, and shirts are stacked neatly, with perfect folds; size stickers are placed with precision; and hangers are lined up uniformly. All that precision turns to chaos as soon as the doors open for business, of course, but employees are trained to restore order whenever they have moments to do so. "One thing to keep in mind," said Edwin Mercedes, a store visual manager who is responsible for the look of several stores in the eastern United States, "is standards. We want perfect folds." Basic standards for customer service are also followed precisely. Tracking such measures as customer service, product quality, or order accuracy is an important supplement to traditional financial and operational performance measurement, but many companies have a hard time identifying and defining nonfinancial measurements. To evaluate and reward employees effectively for the achievement of standards, managers need clear standards that reflect activities that contribute to the organization's overall strategy in a significant way. Standards should be defined clearly and precisely so that employees know what they need to do and can determine whether their activities are on target. Measure Actual Performance Most organizations prepare formal reports of quantitative performance measurements that managers review daily, weekly, or monthly. Managers should take care, however, that they are not generating reports just because they have data to do so. These measurements should be related to the standards set in the first step of the control process, and the reports should be designed to help managers evaluate how well the organization is meeting its standards. For example, if sales growth is a target, the organization should have a means of gathering and reporting sales data. If the organization has identified appropriate measurements, regular review of these reports helps managers stay aware of whether or not the organization is doing what it should. Grady Memorial Hospital in Atlanta measures patient satisfaction based in part on the results of a government-mandated patient satisfaction survey that has been administered since 2006. Hospitals that receive Medicare payments must administer at least 100 patient surveys over a period of a year, and Grady's administrators use the results combined with other metrics to evaluate overall patient care. Concept Connection Ryan McVay/Photodisc/Getty Images When it comes to pharmaceutical drugs, accuracy is essential—human lives are at stake. Researchers like this one follow precise procedures to ensure that test results are both objective and accurate and that the testing processes meet research goals. Pharmaceutical firms establish standards of performance to measure research activities and results. For example, many companies set a standard for how many compounds should move forward at each stage of the drug development process. Compare Performance to Standards The third step in the control process is comparing actual activities to performance standards. When managers read computer reports or walk through the plant, they identify whether actual performance meets, exceeds, or falls short of standards. Typically, performance reports simplify such comparisons by placing the performance standards for the reporting period alongside the actual performance for the same period and by computing the variance—that is, the difference between each actual amount and the associated standard. To correct the problems that most require attention, managers focus on variances. When performance deviates from a standard, managers must interpret the deviation. They are expected to dig beneath the surface and find the cause of the problem. Assume that a grocer established a goal of increasing seafood sales by 10 percent during the month of July, but sales increased by only 8 percent. Managers must investigate the reasons behind the shortfall. They may discover that recent price increases for shrimp and three late shipments of salmon from Canada caused weaker sales during July, for instance. Managers should take an inquiring approach to deviations to gain a broad understanding of factors that influence performance. Effective management control involves subjective judgment and employee discussions, as well as objective analysis of performance data. Take Corrective Action The final step in the feedback control model is to determine what changes, if any, are needed. An example comes from FreshDirect, a premium online grocer in New York City, which used a feedback control model to improve the quality of its products and customer service.

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Hierarchical versus Decentralized Approaches Hierarchical control involves monitoring and influencing employee behavior through extensive use of rules, policies, hierarchy of authority, written documentation, reward systems, and other formal mechanisms. In contrast, decentralized control relies on cultural values, traditions, shared beliefs, and trust to foster compliance with organizational goals. Managers operate on the assumption that employees are trustworthy and willing to perform effectively without extensive rules and close supervision. Exhibit 19.3 contrasts the use of hierarchical and decentralized methods of control. Hierarchical methods define explicit rules, policies, and procedures for employee behavior. Control relies on centralized authority, the formal hierarchy, and close personal supervision. Responsibility for quality control rests with quality control inspectors and supervisors rather than with employees. Job descriptions generally are specific and task-related, and managers define minimal standards for acceptable employee performance. In exchange for meeting the standards, individual employees are given extrinsic rewards such as wages, benefits, and possibly promotions up the hierarchy. Employees rarely participate in the control process, with any participation being formalized through mechanisms such as grievance procedures. With hierarchical control, the organizational culture is somewhat rigid, and managers do not consider culture a useful means of controlling employees and the organization. Technology often is used to control the flow and pace of work or to monitor employees, such as by measuring the number of minutes that employees spend on phone calls or how many keystrokes they make at the computer. Exhibit 19.3Hierarchical and Decentralized Methods of Control Hierarchical Control Decentralized Control Basic assumptions People are incapable of self-discipline and cannot be trusted. They need to be monitored and controlled closely. People work best when they are fully committed to the organization. Actions Uses detailed rules and procedures; formal control systems. Uses top-down authority, formal hierarchy, position power, quality control inspectors. Relies on task-related job descriptions. Emphasizes extrinsic rewards (pay, benefits, status). Features rigid organizational culture; distrust of cultural norms as means of control. Features limited use of rules; relies on values, group and self-control, selection, and socialization. Relies on flexible authority, flat structure, expert power; everyone monitors quality. Relies on results-based job descriptions; emphasizes goals to be achieved. Emphasizes extrinsic and intrinsic rewards (meaningful work, opportunities for growth). Features adaptive culture; culture recognized as means for uniting individual, team, and organizational goals for overall control. Consequences Employees follow instructions and do just what they are told. Employees feel a sense of indifference toward work. Employee absenteeism and turnover is high. Employees take initiative and seek responsibility. Employees are actively engaged and committed to their work. Employee turnover is low. SOURCES: Based on Naresh Khatri et al., "Medical Errors and Quality of Care: From Control to Commitment," California Management Review 48, no. 3 (Spring 2006): 115-141; Richard E. Walton, "From Control to Commitment in the Workplace," Harvard Business Review (March-April 1985): 76-84; and Don Hellriegel, Susan E. Jackson, and John W. Slocum, Jr., Management, 8th ed. (Cincinnati, OH: South-Western, 1999), p. 663. The hierarchical approach to control is strongly evident in many Japanese companies. Japanese culture reflects an obsession with rules and a penchant for bureaucracy that can excel at turning chaos to order. For example, after a devastating earthquake and tsunami struck Japan in 2011, the Japanese efficiently organized evacuation centers for families who lost homes during the disaster. Self-governing committees managed these temporary shelters and laid out, in painstaking detail, the daily responsibilities of the residents. People were assigned specific tasks, including sorting the garbage, washing the bathrooms, and cleaning freshwater tanks. "The Japanese people are the type to feel more reassured the more rules are in place," said Shintara Goto, a tsunami survivor. This hierarchical method of managing the temporary evacuation centers helped survivors find routine and responsibility, which could play a big role in reducing the long-term psychological and physical toll of this natural disaster. Decentralized control is based on values and assumptions that are almost opposite to those of hierarchical control. Rules and procedures are used only when necessary. Managers rely instead on shared goals and values to control employee behavior. The organization places great emphasis on the selection and socialization of employees to ensure that workers have the appropriate values needed to influence behavior toward meeting company goals. No organization can control employees 100 percent of the time, and self-discipline and self-control are what keep workers performing their jobs up to standard. Empowerment of employees, effective socialization, and training all can contribute to internal standards that provide self-control. Nick Sarillo, who owns two Nick's Pizza & Pub shops in Illinois, says his management style is "trust and track," which means giving people the tools and information they need, telling them the result they need to achieve, and then letting them get there in their own way. At the same time, Sarillo keeps track of results so that the company stays on solid ground. He uses open-book management, which will be described in the next section, so that everyone in the company has information about how the company is doing. With decentralized control, power is more dispersed and is based on knowledge and experience as much as position. The organizational structure is flat and horizontal, as discussed in Chapter 10, with flexible authority and teams of workers solving problems and making improvements. Everyone is involved in quality control on an ongoing basis. Job descriptions generally are results based, with an emphasis more on the outcomes to be achieved than on the specific tasks to be performed. Managers use not only extrinsic rewards such as pay, but the intrinsic rewards of meaningful work and the opportunity to learn and grow. Technology is used to empower employees by giving them the information they need to make effective decisions, work together, and solve problems. People are rewarded for team and organizational success as well as their individual performance, and the emphasis is on equity among employees. Employees participate in a wide range of areas, including setting goals, determining standards of performance, governing quality, and designing control systems. With decentralized control, the culture is adaptive, and managers recognize the importance of organizational culture for uniting individual, team, and organizational goals for greater overall control. Ideally, with decentralized control, employees will pool their areas of expertise to arrive at procedures that are better than managers could come up with working alone. Campbell Soup is using decentralized control by enlisting its workers to help squeeze efficiency out of its plants.

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Imagine taking a beloved family member to a hospital or clinic to receive an injection of pain medication only to have the person contract fungal meningitis, a rare but potentially deadly disease. That's exactly what happened for many families when tainted spinal steroid injections from the New England Compounding Center (NECC) caused one of the worst public health drug disasters in U.S. history. As many as 14,000 patients across 20 states were exposed to fungal meningitis in 2012, with 800 becoming ill and at least 64 dying. A federal inspection found mold and bacteria growing on surfaces, greenish-yellow residue on sterilization equipment, and air conditioning equipment that was shut off at night despite the importance of controlling temperature and humidity. Although U.S. Food and Drug Administration (FDA) inspectors found numerous instances of violations of federal standards, they also noted that surfaces in the clean rooms were contaminated with levels of bacteria or mold exceeding levels at which the company's own procedures called for remedial measures, yet there was no evidence that the company ever took such measures. Company managers, the Massachusetts Board of Pharmacy, and FDA officials all came under scrutiny in the wake of this breakdown of quality control. Fourteen owners, managers, employees, and others associated with the now-defunct NECC went on trial in late 2016 on 131 charges ranging from fraud to second-degree murder. What a tragic illustration of the need for quality and behavioral control. Control is a serious responsibility for every manager. It might not always be a matter of life or death, but as a manager, you will use a variety of measures to monitor employee behavior and keep track of the organization's performance and finances. Many of these measures will involve control issues, including controlling work processes, regulating employee behavior, maintaining quality standards, setting up basic systems for allocating financial resources, developing human resources, analyzing financial performance, and evaluating overall profitability. This chapter introduces basic mechanisms for controlling an organization. We begin by defining organizational control and summarizing the four steps in the control process. Then we discuss the use of the balanced scorecard to measure performance and examine the changing philosophy of control. We discuss today's approach to total quality management (TQM) and consider methods for controlling financial performance, including the use of budgets and financial statements.

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Open-Book Management One important aspect of decentralized control in many organizations is open-book management. An organization that promotes information sharing and teamwork admits employees throughout the organization into the loop of financial control and responsibility to encourage active participation and commitment to goals. Open-book management allows employees to see for themselves—through charts, computer printouts, meetings, and so forth—the financial condition of the company. Second, open-book management shows the individual employee how his or her job fits into the big picture and affects the financial future of the organization. Finally, open-book management ties employee rewards to the company's overall success. With training in interpreting the financial data, employees can see the interdependence and importance of each function. If they are rewarded according to performance, they become motivated to take responsibility for their entire team or function, rather than merely their individual jobs. The goal of open-book management is to get every employee thinking and acting like a business owner. To get employees to think like owners, management provides them with the same information owners have: what money is coming in and where it is going. Open-book management helps employees appreciate why efficiency is important to the organization's success as well as their own. Laura Ortmann, who owns Ginger Bay Salon and Spa in St. Louis, Missouri, with her husband, discovered that her hairstylists and massage therapists became more motivated to reach their own performance goals once she trained them to understand the company's financial goals. Individual and company goals were recorded prominently on a scoreboard in the break room and listed each employee's daily sales results and whether goals were met. "Behavior changed overnight," said Ortmann. "No one wants their name next to a low number." By helping her employees see how their efforts affected the financial success of the company, Ortmann increased their motivation. "I love the numbers, and I love knowing how I'm doing," says nail technician Terri Kavanaugh. Remember This The philosophy of control has shifted to reflect changes in leadership methods. Hierarchical control involves monitoring and influencing employee behavior through extensive use of rules, policies, hierarchy of authority, written documentation, reward systems, and other formal mechanisms. With decentralized control, the organization fosters compliance with organizational goals through the use of organizational culture, group norms, and a focus on goals rather than rules and procedures. Campbell Soup uses decentralized control at its plant in Maxton, North Carolina, to encourage employees to cut costs and increase efficiency. Open-book management allows employees to see for themselves the financial condition of the organization and encourages them to think and act like business owners.

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Revenue Budget A revenue budget lists forecasted and actual revenues of the organization. In general, revenues below the budgeted amount signal a need to investigate the problem to see whether the organization can improve revenues. In contrast, revenues above budget would require determining whether the organization can obtain the necessary resources to meet the higher-than-expected demand for its products or services. Managers then formulate action plans to correct the budget variance.

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TQM Success Factors Despite its promise, TQM does not always work. A few firms have had disappointing results. In particular, Six Sigma principles might not be appropriate for all organizational problems, and some companies have expended tremendous energy and resources for little payoff. Many contingency factors (listed in Exhibit 19.5) can influence the success of a TQM program. For example, quality circles are most beneficial when employees have challenging jobs; participation in a quality circle can contribute to productivity because it enables employees to pool their knowledge and solve interesting problems. TQM also tends to be most successful when it enriches jobs and improves employee motivation. In addition, when participating in the TQM program improves workers' problem-solving skills, productivity is likely to increase. Finally, a TQM program has the greatest chance of success in a corporate culture that values quality and stresses continuous improvement. Exhibit 19.5Quality Program Success Factors Positive Factors Negative Factors Tasks make great skill demands on employees. TQM serves to enrich jobs and motivate employees. Problem-solving skills are improved for all employees. Participation and teamwork are used to tackle significant problems. Continuous improvement is a way of life. Management expectations are unrealistically high. Middle managers are dissatisfied about loss of authority. Workers are dissatisfied with other aspects of organizational life. Union leaders are left out of quality control discussions. Managers wait for big, dramatic innovations. Remember This Total quality management (TQM) is an organization-wide effort to infuse quality into every activity in a company through continuous improvement. The TQM philosophy focuses on teamwork, increasing customer satisfaction, and lowering costs. Quality circles offer one technique for implementing TQM and include groups of 6 to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work. Another option for tracking quality is benchmarking, the continuous process of measuring products, services, and practices against major competitors or industry leaders. Six Sigma is a quality control approach that emphasizes a relentless pursuit of higher quality and lower costs. Quality partnering involves assigning dedicated personnel within a particular functional area of the business to identify opportunities for improvement throughout the work process. Continuous improvement, or kaizen, is the implementation of a large number of small, incremental improvements in all areas of the organization on an ongoing basis.

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TQM Techniques The implementation of TQM involves the use of many techniques, including quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous improvement. Quality Circles A quality circle is a group of 6 to 12 volunteer employees who meet regularly to discuss and solve problems that affect the quality of their work. At a set time during the workweek, the members of the quality circle meet, identify problems, and try to find solutions. Circle members are free to collect data and take surveys. Many companies train people in team building, problem solving, and statistical quality control. The reason for using quality circles is to push decision making to an organization level at which recommendations can be made by the people who do the job and know it better than anyone else. At Carrier Collierville, a manufacturer of residential air conditioners and heat pumps, a quality circle attacked a leak issue at braze joints on a heat pump component. Changes made to the work area resulted in a 50 percent reduction in leaks and associated repair costs. Benchmarking "Quality is the result of a carefully constructed cultural environment. It has to be the fabric of the organization, not part of the fabric." — Philip Crosby (1926-2001), American Businessman and Quality Guru Introduced by Xerox in 1979, benchmarking is now a major TQM component. Benchmarking is defined as "the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders to identify areas for improvement." For example, in the original Xerox study, managers compared Xerox to Japanese competitors and found that "it took twice as long as the Japanese competitors to bring a product to market, five times the number of engineers, four times the number of design changes, and three times the design costs." This enabled them to identify and allocate resources to specific areas to increase productivity and remain competitive. Organizations may also use benchmarking for generating new business ideas, assessing market demand, or identifying best practices within an industry. A five-step benchmarking process is shown in Exhibit 19.4. Exhibit 19.4 A Five-Step Benchmarking Process SOURCE: Based on Deven Shah and Brian H. Kleiner, "Benchmarking for Quality," Industrial Management (March-April 2011): 22-25. The first step involves planning the benchmarking study, which includes identifying the objectives of the study and the characteristics of a product or service that significantly influence customer satisfaction. The second step involves identifying the source of the information to be collected. For example, the sources of data for a Sherwin-Williams benchmarking study might include national independent lab studies or studies published in Consumer Reports magazine. Once the source of information is identified, data is then collected. Xerox collected information on the order fulfillment techniques of L. L. Bean, the Freeport, Maine, mail-order firm, and learned ways to reduce warehouse costs by 10 percent. The fourth step includes analyzing the benchmarking data that has been collected and recommending areas of improvement. The fifth step includes implementing recommendations and then monitoring them through continuous benchmarking. Six Sigma Six Sigma quality principles were first introduced by Motorola in the 1980s and were later popularized by General Electric (GE), where former CEO Jack Welch praised Six Sigma for quality and efficiency gains that saved the company billions of dollars. Based on the Greek letter sigma, which statisticians use to measure how far something deviates from perfection, Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts. That essentially means being defect-free 99.9997 percent of the time. However, Six Sigma has deviated from its precise definition to become a generic term for a quality-control approach that takes nothing for granted and emphasizes a disciplined and relentless pursuit of higher quality and lower costs. Like other aspects of TQM, Six Sigma is not just for manufacturing organizations. Service firms have reaped significant benefits from Six Sigma and other TQM techniques. Cardinal Health, a distributor of health care products, is a critical link in the health care supply chain and handles one-fourth of all medications prescribed every day. Cardinal embarked on a Lean Six Sigma initiative that has led to a 30 percent drop in the order error rate over a three-year period. Cardinal has now extended the scope of its Six Sigma efforts to its supply chain partners with a goal of achieving zero errors, zero waste, and zero lost revenue. Six Sigma is based on a five-step methodology referred to as DMAIC, pronounced "deMay-ick" (standing for Define, Measure, Analyze, Improve, and Control), which provides a structured way for organizations to approach and solve problems. Effectively implementing Six Sigma requires a major commitment from top management because Six Sigma involves widespread change throughout the organization. At Honeywell, for example, all employees are expected to understand Six Sigma fundamentals. Six Sigma provides a common language among employees, complements efforts to cut unnecessary costs from the organization, and supports efforts to "get it right the first time." Honeywell explains its dedication to Six Sigma and what it means to reach this high level of performance with these examples: If your water heater operated at Four Sigma (not Six), you would be without hot water for more than 54 hours each year. At Six Sigma, you would be without hot water for less than two minutes a year. If your smartphone operated at Four Sigma, you would be without service for more than four hours a month. At Six Sigma, it would be about nine seconds a month. A Four Sigma process will typically result in one defective package of products for every three truckloads shipped. A Six Sigma process means one defective package for every 5,350 truckloads. Green PowerThe Honeybee Style The honeybee is known for its hard work and wise use of natural resources, as well as for living in a cooperative, interconnected community. Likewise, Munich-based BMW recognizes that true sustainability involves the protection and wise use of not only the environment, but of every resource used to provide quality vehicles for consumers. Dating back to the 1970s, BMW's approach to sustainable growth can be seen throughout its well-controlled production process. Self-managed teams oversee rigorous quality control measurement of sustainability, building for BMW an A+ international sustainability rating. A total of 23 interconnected "honeybee" practices address everything from ethical behavior and social responsibility to quality and innovation. The results include the recycling of production waste and the reuse of scrap from BMW's new carbon-fiber car bodies. Source: Gayle C. Avery and Harald Bergsteiner, "How BMW Successfully Practices Sustainable Leadership Principles," Strategy & Leadership 39, no. 6 (2011): 11-18. Quality Partnering Take a Moment As a new manager, will you support TQM by taking personal responsibility for improving the tasks and activities that you work on? Refer to your responses to "Self-Assessment: What Is Your Attitude Toward Improvement?" to get some feedback on your attitude toward continuous improvement. One of the drawbacks of a traditional quality control program is that people from the quality control department are often seen as "outsiders" to the business groups they serve. Because they don't always have a strong knowledge of the processes that they are studying, their work may be viewed with suspicion or as an interruption to the normal work routine. The risk here is that quality control is seen as separate from everyday work. Another drawback of the traditional model is that quality control is usually conducted after a product is completed or a service delivered—the time when it's most expensive to make corrections. A new approach called quality partnering involves assigning dedicated personnel within a particular functional area of the business. In this approach, the quality control personnel work alongside others within a functional area identifying opportunities for quality improvements throughout the work process. This integrated, partnering approach to quality makes it possible to detect and address defects early in the product life cycle, when they can be corrected most easily. Another advantage of this approach is that quality partners are viewed as "insiders" and peers who are readily accepted into the work group. Continuous Improvement In North America, crash programs and designs traditionally have been the preferred method of innovation. Managers measure the expected benefits of a change and favor the ideas with the biggest payoffs. In contrast, Japanese companies have realized extraordinary success from making a series of mostly small improvements. This approach, called continuous improvement, or kaizen, is the implementation of a large number of small, incremental improvements in all areas of the organization on an ongoing basis. In a successful TQM program, all employees learn that they are expected to contribute by initiating changes in their own job activities. The basic philosophy is that improving things a little bit at a time, all the time, has the highest probability of success. Innovations can start simple, and employees can build on their success in this unending process. A commitment to continuous improvement has enabled furniture manufacturer La-Z-Boy to thrive, as illustrated by the following example from the company's flagship operation in Dayton, Tennessee. Manager SpotlightLa-Z-Boy "If we were doing business the same way we did in 2005," said La-Z-Boy manager David Robinson, "somebody else would be here because we would already be closed." The U.S. furniture industry has been decimated by foreign competition, but a dedication to cost efficiency and continuous improvement has enabled La-Z-Boy to flourish. Robinson, La-Z-Boy's continuous improvement and quality director at the company's Dayton, Tennessee, facility, points out that 23 of the facility's managers and engineers have been trained in Six Sigma, and cross-functional teams have completed 24 kaizen events focused on safety, quality, and productivity. A significant process improvement at the Dayton facility is the Flawless Launch Program, which assigns a production engineer to make sure quality and manufacturability is designed into all new products. "Before the product ever makes it to manufacturing, she has been on the front end of the design," Robinson says of the current production engineer. That way, the company knows the tooling and equipment that will be needed to produce the product repeatedly, at low cost, and relatively error free. As an example, he points to the plant's first attempt to manufacture an electric lift chair. It had about a 40 percent failure rate in the field. After reintroducing it using the flawless launch process, Robinson reports, "We now have a fraction of 1 percent failure in the field." Thanks to La-Z-Boy's dedication to continuous improvement, operating expenses have been reduced by about $50 million a year. Over a recent three-year period, productivity improved by 42 percent and scrap was reduced by 71 percent. Increases in productivity and decreases in cost mean consumers can purchase a basic La-Z-Boy recliner for about the same price they might have paid when the Dayton facility first went into operation in the early 1970s

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The Changing Philosophy of Control Take a Moment Will you take a hierarchical or a decentralized approach to control as a new manager? Complete "Self-Assessment: Do You Prefer Organizational Regulation and Control?" to understand your attitude toward organizational control. Managers' approach to control is changing in many of today's organizations. In connection with the shift to employee participation and empowerment, many companies are adopting a decentralized rather than a hierarchical control process. Hierarchical control and decentralized control represent different philosophies of corporate culture, which was discussed in Chapter 3. Most organizations display some aspects of both hierarchical and decentralized control, but managers generally emphasize one or the other, depending on the organizational culture and their own beliefs about control.

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The Meaning of Control Before New York City buildings are demolished or renovated, licensed inspectors are required to inspect them for the presence of lead or asbestos. Both substances can cause severe, long-term health problems, including cancer. If either is found, it must be either removed or contained using an expensive and time-consuming process. Given the serious health risks associated with these two substances, you could assume that the inspection process would be carefully regulated and controlled. Yet many law enforcement officials and industry experts say that New York City's inspection system is highly corrupt. As evidence, licensed safety inspector Saverio F. Todaro recently made a stunning confession in federal court. He revealed that although he had submitted clean asbestos and lead test results for over 200 buildings and apartments, he had not performed a single one of the tests. Although shocking, the Department of Environmental Protection (DEP) claims that these crimes occur frequently and easily because of a lack of controls. The DEP audits only a tiny fraction of the roughly 28,400 projects that inspectors like Todaro certify each year as safe. "We can always look for new ways to improve our process," said a spokesman for the mayor. "DEP is going to start increasing audits, which is the right step to ensure inspections are being completed properly." Organizational control refers to the systematic process of regulating organizational activities to make them consistent with the expectations established in plans, targets, and standards of performance. In a classic article on the control function, Douglas S. Sherwin summarizes the concept as follows: "The essence of control is action which adjusts operations to predetermined standards, and its basis is information in the hands of managers." Thus, effectively controlling an organization requires information about performance standards and actual performance, as well as actions taken to correct any deviations from the standards. Concept Connection ndoeljindoel/ Shutterstock.com The state of California has deep concerns about paint solvents, concrete slurry, and other pollutants entering the water supply through work done at construction sites. Thus, the state government now offers training programs for contractors and others in the construction industry to learn how to improve organizational control. In addition to using filters that keep the water supply clean, effective control means ensuring that builders comply with new state regulations. Managers must decide what information is essential, how they will obtain that information, and how they can and should respond to it. Having the correct data is essential. Managers decide which standards, measurements, and metrics are needed to monitor and control the organization effectively and set up systems for obtaining that information. If a hospital, for example, carefully monitors and controls its health care services, patients should receive safe, high-quality health care. A pay-for-performance system built into President Barack Obama's health care overhaul for Medicare payments to hospitals prompted some hospitals to initiate broader initiatives that tie doctors' pay to patient outcomes and quality measures. New York City's Health and Hospitals Corporation, which runs the city's 11 public hospitals, for example, will monitor 13 performance indicators that are believed to be correlated with better quality care, including how quickly emergency room patients go from triage to beds, whether doctors get to the operating room on time, how well patients say their doctors communicate with them, and so forth. The idea is that tying doctors' raises to how well they perform on the benchmarks will improve patient care. The "Manager's Shoptalk" describes auto-analytics, an innovative reporting system for individuals that can provide information that may help people control their own personal and professional growth. Manager's ShoptalkQuantify Yourself Imagine becoming better at your job and more satisfied with your life by tracking information that reveals exactly how you spend your day. For 22 years, entrepreneur and scientist Stephen Wolfram did just that. He mapped data about his time spent in meetings, his use of e-mail, and the number of keystrokes he logged so that he could analyze how he spent his time. Wolfram was able to identify work habits that squelched his creativity and stymied his productivity. So he started planning changes that would help him become more productive and happier. New devices such as computer software and smartphone apps help people gather and analyze data about what they do at work so they can use it to do their jobs better. This interest in self-awareness is part of a growing discipline called auto-analytics, which is the practice of voluntarily collecting and analyzing data about oneself in order to improve. It consists of the following: Tracking Screen Time. While it may be unsettling to have our managers watching what's on our computer screens, it's much more acceptable when we do the watching. New technology called knowledge workload tracking records how you use your computer, such as measuring how long you have an open window, how often you switch between windows, and how long you're idle. The software turns all the measurements into charts so you can see where you're spending your time and how you can improve your productivity. One computer programmer thought his online chats were eating into his programming time, so he analyzed how much time he spent chatting during certain periods and then looked at how much code he wrote during those times. Surprisingly, he found that talking online with colleagues actually improved his productivity. Measuring Cognitive Tasks. Another set of tracking tools can help you gather data as you perform cognitive tasks, such as client research on your smartphone or statistical analysis in Microsoft Excel. Bob Evans, a Google engineer, used an app called MeetGrinder to explore the relationship between his attention and his productivity. "As engineers, we load up our heads with all these variables, the intellectual pieces of the systems we are building. If we get distracted, we lose that thread in our heads," he said. MeetGrinder revealed to Evans that he needs about four straight hours to get anything challenging done, so he tackles those projects when he has that kind of time, not on days that are interrupted with meetings and phone calls. Improving Health. Exercise, amount of sleep, and the stress levels of knowledge workers have been shown to affect productivity, creativity, and job performance. People can choose from a variety of mobile apps and wearable sensors that collect valuable data about their physical health. Sacha Chua wanted to better understand how her sleep schedule affected her professional priorities, so she monitored her bedtimes, wake-up times, and amount of sleep over several weeks using a tracker called Sleep On It. She changed her routine and started waking up at 5:40 a.m. instead of 8:30 a.m. She gave up late-night activities like browsing the Web and started going to bed earlier. With these adjustments, she discovered that her work productivity soared. Tools used for auto-analytics will continue to become more sophisticated. The data they reveal can provide the hard evidence we sometimes need to adjust the way we use our time and nurture our minds and bodies to have more success in work and life.

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Total Quality Management Another popular approach based on a decentralized control philosophy is total quality management (TQM), an organization-wide effort to infuse quality into every activity in a company through continuous improvement. Managing quality is a concern for every organization. In early 2016, the giant food company Nestlé recalled three million boxes of DiGiorno pizza and Lean Cuisine and Stouffer's frozen dinners in the United States because of a suspicion that the spinach in them might contain bits of glass. Around the same time, Perdue Foods recalled around 5,000 pounds of Applegate Farms chicken nuggets because of possible contamination with plastic. Recalls related to foreign materials are less common than those related to food-borne illnesses, but they can sometimes be even more challenging for managers, who have to determine what went wrong and how much product was affected. Companies such as Nestlé and Perdue err on the side of caution, pulling a wide range of food off shelves rather than risk missing something. Food safety is of growing concern for consumers, so managers in food companies and restaurants are paying even greater attention to quality. TQM became attractive to U.S. managers in the 1980s because it had been implemented successfully by Japanese companies, such as Toyota, Canon, and Honda, which were gaining market share and an international reputation for high quality. The Japanese system was based on the work of such U.S. researchers and consultants as W. Edwards Deming, Joseph Juran, and Armand Feigenbaum, whose ideas attracted U.S. executives after the methods were tested overseas. The TQM philosophy focuses on teamwork, increasing customer satisfaction, and lowering costs. Organizations implement TQM by encouraging managers and employees to collaborate across functions and departments, as well as with customers and suppliers, to identify areas for improvement, no matter how small. Each quality improvement is a step toward perfection and meeting a goal of zero defects. Quality control becomes part of the day-to-day business of every employee rather than being assigned to specialized departments.

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Zero-Based Budget Zero-based budgeting is an approach to planning and decision making that requires a complete justification for every line item in a budget instead of carrying forward a prior budget and applying a percentage change. A zero-based budget begins with a starting point of $0, and every dollar added to the budget is reflected by an actual, documented need. 3G Capital Partners LP, a Brazilian private-equity firm that has bought numerous companies in the food industry, including Burger King Worldwide, Tim Horton's Inc., and H. J. Heinz Company, is a big believer in using zero-based budgeting to get and keep companies on track financially. Manager Spotlight3G Capital Partners, H. J. Heinz Company, Kraft Food Group 3G Capital Partners is the major investor and owner of the H. J. Heinz Company and the Kraft Foods Group. Both companies have struggled financially in recent years as consumer tastes rapidly shift away from processed foods, so 3G Capital managers saw that operating costs must be reduced. To lower costs and increase operational efficiency at Heinz and Kraft, 3G Capital implemented zero-based budgeting, requiring managers to justify every dollar they spend from scratch each year. At Heinz, zero-based budgeting led to significant cost cuts, from ditching corporate jets and slashing headquarters staff to requiring employees to get permission to make color photocopies. Other companies have also taken the plunge into zero-based budgeting to reduce costs and enforce budget discipline. Coca-Cola and Campbell Soup both plan major cost reductions using this budgeting technique. Many other companies, including Anheuser-Busch and oil and gas giant Shell, have implemented zero-based budgeting to drive significant financial performance improvements. "There's sometimes extravagance that exists at some of these firms, and then there's just bureaucratic waste," said former Anheuser-Busch president Dave Peacock. By forcing managers to evaluate and justify the costs and benefits of each dollar, zero-based budgeting can help companies shave excessive and unnecessary costs from their yearly expenditures. Budgeting is an important part of organizational planning and control. Many traditional companies use top-down budgeting, which means that the budgeted amounts for the coming year are literally imposed on middle- and lower-level managers. These managers set departmental budget targets in accordance with overall company revenues and expenditures specified by top executives. Although the top-down process provides some advantages, the movement toward employee empowerment, participation, and learning means that many organizations are adopting bottom-up budgeting, a process in which lower-level managers anticipate their departments' resource needs and pass them up to top management for approval. Companies of all kinds are increasingly involving line managers in the budgeting process. At the San Diego Zoo, scientists, animal keepers, and other line managers use software and templates to plan their department's budget needs because, as CFO Paula Brock says, "Nobody knows that side of the business better than they do." Each of the 145 zoo departments also does a monthly budget close and reforecast so that resources can be redirected as needed to achieve goals within budget constraints. Thanks to the bottom-up process, for example, the zoo was able to redirect resources quickly to protect its valuable exotic bird collection from an outbreak of a highly infectious bird disease without significantly damaging the rest of the organization's budget. Remember This Budgetary control, one of the most commonly used forms of managerial control, is the process of setting targets for an organization's expenditures, monitoring results and comparing them to the budget, and making changes as needed. A responsibility center is any organizational department or unit under the supervision of a single person who is responsible for its activity. An expense budget outlines the anticipated and actual expenses for a responsibility center. A revenue budget lists forecasted and actual revenues of the organization. The cash budget estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organization has sufficient cash to meet its obligations. A budget that plans and reports investments in major assets to be depreciated over several years is called a capital budget. Zero-based budgeting is an approach to planning and decision making that starts at zero and requires a complete justification for every line item in a budget, instead of carrying forward a prior budget and applying a percentage change. Many companies use top-down budgeting, which means that the budgeted amounts for the coming year are literally imposed on middle- and lower-level managers. On the other hand, bottom-up budgeting involves lower-level managers anticipating their department's budget needs and passing them up to top management for approval.