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Chapter 08 Control, Change, and Entrepreneurship

Management Snapshot (pp. 249-250 of tet! Toyota Needs a Major Fix to

Its Quality Control System "o# Should Managers $se Control to %mpro&e
Toyota pioneered the system of lean production that changed how cars are
assembled and has been imitated by all global carmakers. It also pursues total
quality management that makes production-line employees responsible for fnding
improvements to work procedures. It has used various strategies such as
pokayoke and !!!"# which has given it a ma$or competitive advantage. %ut
Toyota is not perfect. &ver the years it has made several mistakes as it searched
for new ways to increase innovation. Its engineers have designed faulty air-
conditioning systems and airbags. The vehicles had become increasingly comple'
to assemble and employees were not trained. &ne reason was its rapid e'pansion
across the globe. It came as a tremendous shock in "(#( when there were reports
of uncontrolled acceleration and braking in some of its vehicles. This resulted in a
recall of more than si' million ).*. vehicles. The current president of Toyota +kio
Toyoda vowed to revamp its organi,ational structure to improve its ability to
control issues such as safety and quality. -e admitted that Toyota.s push to
become the world.s largest carmaker had taken the focus away from customer
satisfaction. -e announced that Toyota would increase the number of its
technology centers hire hundreds of new engineers and appoint chief quality
o/cers in each region. 0ow it is decentrali,ing control to engineers at the front
line to speed decision making.
*hat %s +rgani,ational Control)
Three types of controls available to managers: Output control, Behaior
control, and Clan control!
Controllin" is the process whereby managers monitor and regulate how e/ciently
and e1ectively an organi,ation and its members are performing the activities
necessary to achieve organi,ational goals.
In controlling managers monitor and evaluate whether their organi,ation.s
strategy and structure are working as intended how they could be improved
and how they might be changed if they are not working.
!ontrol involves keeping an organi,ation on track and anticipating events that
might occur.
It is also concerned with keeping employees motivated focused on the
important problems facing the organi,ation and working together to make
changes that improve organi,ational performance.
-.he %mportan(e of +rgani,ational Control/
+ control system contains the measures or yardsticks that allow managers to
assess how e/ciently the organi,ation is producing goods and services.
2ithout a control system in place managers have no idea how their
organi,ation is performing and how its performance can be improved.
&rgani,ational control is important in determining the quality of goods and
services because it gives managers feedback on product quality.
31ective managers create a control system that consistently monitors the
quality of goods and services so that they can make continuous improvements
to quality.
4anagers can make their organi,ations more responsive to customers by
developing a control system to evaluate how well customer-contact employees
are performing their $obs
4onitoring employee behavior can help managers fnd ways to increase
employees. performance levels.
!ontrolling can raise the level of innovation in an organi,ation by deciding on
the appropriate control systems to encourage risk taking.
-Control S0stems and %./
Control s0stems are formal target-setting monitoring evaluation and feedback
systems that provide managers with information about whether the organi,ation.s
strategy and structure are working e/ciently and e1ectively.
+n e1ective control system has three characteristics5
#. It is 6e'ible enough to allow managers to respond as necessary to
une'pected events
". It provides accurate information
7. It provides managers with the information in a timely manner.
0ew forms of IT have revolutioni,ed control systems because they facilitate the
6ow of accurate and timely information up and down the organi,ational
hierarchy and between functions and divisions.
!ontrol systems are developed to measure performance at each stage in the
conversion of inputs into fnished goods and services.
+t the input stage managers use feedfor#ard (ontrol to anticipate problems
before they arise so that problems do not occur later during the conversion
process. +t this stage IT can be used to keep in contact with suppliers monitor
their progress and control the quality of the inputs received from them.
+t the conversion stage (on(urrent (ontrol gives managers immediate
feedback on how e/ciently inputs are being transformed into outputs.
!oncurrent control through IT alerts managers to the need to react quickly to
the source of the problem. !oncurrent control is at the heart of programs to
increase quality.
+t the output stage managers use feed1a(2 (ontrol to provide information
about customers. reactions to goods and services so corrective action can be
taken if necessary.
-.he Control 'ro(ess/
The control process whether at the input conversion or output stage can be
broken down into four steps. They are5
Step #: $sta%lish the standard o& per&ormance, "oals, or tar"ets
a"ainst 'hich per&ormance is to %e ealuated.
#. The standards of performance that managers select measure e/ciency
quality responsiveness to customers and innovation.
". 8erformance standards selected at one level a1ect those at the other
levels and ultimately the performance of individual managers is
evaluated in terms of their ability to reduce costs.
Step (: Measure actual per&ormance.
o 4anagers can measure or evaluate two things5
#. the actual outputs that result from the behavior of their members
". the behaviors themselves 9hence the terms output control and
behavior control:.
In general the more non-routine or comple' organi,ational activities are the
harder it is for managers to measure outputs or behaviors. &utputs however
are usually easier to measure than behaviors because they are more tangible
and ob$ective.
Step ): Compare actual per&ormance a"ainst chosen standards o&
#. If per&ormance is hi"her than expected managers might decide they
set performance standards too low and may raise them for the ne't
period to challenge their subordinates.
". If per&ormance is too lo' and standards were not reached or if
standards were set so high that employees could not achieve them
managers must decide whether to take corrective action.
Step *: $aluate the result and initiate correctie action i& the
standard is not %ein" achieed!
#. If managers decide that the level of performance is unacceptable they
must try to change the way work activities are performed to solve the
problem +e!"! 'or, standards are too hi"h, or latest technolo"y is
not %ein" used - etc..
+utput Control
+ll managers develop a system of output control for their organi,ations. The three
main mechanisms that managers use to assess output or performance are
fnancial measures organi,ational goals and operating budgets.
-3inan(ial Measures of 'erforman(e/
Top managers use various fnancial measures to evaluate performance. The most
common fnancial measures are5
/ro0t ratios measure how e/ciently managers are using the organi,ation.s
resources to generate profts.
o 1eturn on inestment +1OI./ This is an organi,ation.s net income
before ta'es divided by its total assets is the most commonly used
fnancial performance measure.
o Operatin" mar"in is calculated by dividing a company.s operating proft
by sales revenues.
2i3uidity ratios measure how well managers have protected organi,ational
resources to be able to meet short-term obligations.
o The current ratio 9current assets divided by current liabilities: tells
managers whether they have the resources to meet claims for short-term
o The quick ratio tells whether they can pay these claims without selling
2eera"e ratios such as the debt-to-assets ratio and the times-covered ratio
measure the degrees to which managers use debt or equity to fnance ongoing
4ctiity ratios provide measures of how well managers are creating value
from assets.
o Inentory turnoer measures how e/ciently managers are turning
inventory over so e'cess inventory is not carried.
o 5ays sales outstandin" provide information on how e/ciently
managers are collecting revenue from customers.
;inancial results inform managers about the results of past decisions but do not
tell them how to fnd new opportunities to build competitive advantage in the
future. To encourage a future oriented approach organi,ational goals are needed.
-+rgani,ational 4oals/
+fter the top managers have set the organi,ation.s overall goals they then
establish performance standards for the various divisions and functions.
These standards specify for divisional and functional managers the level at
which their units must perform if the organi,ation is to achieve its overall goals.
<ivisional managers then develop a business- level strategy that they hope will
allow them to achieve that goal.
In consultation with functional managers they specify the functional goals that
managers of di1erent functions need to achieve to allow the division to achieve
its goals.
In turn functional managers establish goals that frst-line managers and non-
managerial employees need to achieve to allow the function to achieve its
It is vital that the goals set at each level harmoni,e with the goals set at other
+lso goals should be set appropriately so that managers are motivated to
accomplish them.
The best goals are specifc di/cult goals that will challenge and stretch
managers. ability but are not out of reach.
-+perating 5udgets/
The ne't step in developing an output control system is to establish operating
+n operating 1udget is a blueprint that states how managers intend to use
organi,ational resources to achieve organi,ational goals e/ciently.
4anagers at one level allocate to subordinate managers a specifc amount of
resources to produce goods and services.
These lower-level managers are evaluated on their ability to stay within the
budget and to make the best use of resources.
=arge organi,ations often treat each division as a stand-alone responsibility
center and then evaluate each division.s contribution to corporate
o 4anagers of a division may be given a f'ed budget and evaluated on the
amount of goods or services they can produce from it 9a cost or e'pense
budget approach:.
o &r managers may be asked to ma'imi,e the revenues from the sales of
goods and services produced 9a revenue budget approach:.
o They may also be evaluated on the di1erence between the revenues
generated and the budgeted cost of making those goods and services 9a
proft budget approach:.
6'ro1lems #ith +utput Control/
2hen designing an output control system managers must be sure that the output
standards they create motivate managers at all levels and do not encourage
inappropriate behavior as a way to achieve organi,ational goals.
o 4anagers must be sensitive to how they use output control and
constantly monitor its e1ects at all levels in the organi,ation. &utput
controls should serve as a guide to appropriate action.
5eha&ior Control
%ehavior control along with output control is a method of motivating employees.
There are three mechanisms of behavior control that managers can use5 direct
supervision management by ob$ectives and rules and standard operating
-6ire(t Super&ision/
The most immediate and potent form of behavior control is direct supervision by
)nder direct supervision managers actively monitor and observe teach and
correct subordinates.
2hen managers personally supervise subordinates they lead by e'ample and
in this way help subordinates develop and increase their own skills.
8roblems associated with direct supervision include the following5
o It is very e'pensive because a manager can personally manage only a
small number of subordinates e1ectively. or this reason output control is
usually preferred over behavior control.
o <irect supervision can de-motivate subordinates if they feel that they are
not free to make their own decisions.
o ;or many $obs control through direct supervision is not feasible. The more
comple' a $ob is the more di/cult it is for a manager to determine how
well an employee is performing.
-Management 10 +17e(ti&es/
To provide a framework within which to evaluate subordinates. behavior many
organi,ations implement some version of management 10 o17e(ti&es (M5+!.
Management 10 o17e(ti&es is a system of evaluating subordinates on their
ability to achieve specifc organi,ational goals or performance standards and to
meet operating budgets. It involves three steps5
Step 8/ *pecifc goals and ob$ectives are established at each level of the
Step 2/ 4anagers and their subordinates together determine the subordinates.
Step 9/ 4anagers and their subordinates periodically review the subordinates.
progress toward meeting goals.
!ompanies in which responsibilities have been decentrali,ed to empowered teams
4%& works somewhat di1erently.
4anagers ask each team to develop a set of goals and performance targets that
the team hopes to achieve.
4anagers then negotiate with each team to establish its fnal goals and the
budget the team will need to achieve them.
@ewards are linked to team performance not to the performance of any one
team member.
-5ureau(rati( Control/
2hen direct supervision is too e'pensive and 4%& is inappropriate managers may
use bureaucratic control. 5ureau(rati( (ontrol is control of behavior by means
of a comprehensive system of rules and standard operating procedures 9*&8s: that
shape and regulate the behavior of divisions functions and individuals.
@ules and *&8s guide behavior and specify what employees are to do when
they confront a problem.
It is the responsibility of a manager to develop rules that allow employees to
perform their activities e/ciently and e1ectively.
2hen employees follow the rules their behavior is standardi,edAactions are
performed in the same way time and time again. There is no need to monitor
the outputs of behavior because standardi,ed behavior leads to standardi,ed
6'ro1lems #ith 5ureau(rati( Control5
2ith a 1ureau(rati( (ontrol system in place managers can manage by
e'ception and intervene and take corrective action only when necessary.
-owever managers need to be aware of the number of problems associated
with bureaucratic control which can reduce organi,ational e1ectiveness.
3stablishing rules is always easier than discarding them. If the amount of red
tape becomes too great decision making slows down. This sluggishness can
imperil an organi,ation.s survival.
%ecause rules constrain and standardi,e behavior there is a danger that people
become so used to automatically following rules that they stop thinking for
themselves. Innovation is incompatible with the use of e'tensive bureaucratic
%ureaucratic control is most useful when organi,ational activities are routine
and when employees are making programmed decisions. It is less useful where
nonprogrammed decisions have to be made and managers have to react
quickly to changes.
;or many of the most signifcant organi,ational activities output control and
behavior control are inappropriate for the following reasons5
+ manager cannot evaluate the performance of workers such as doctors
research scientists or engineers by observing their behavior on a day-to-day
@ules and *&8s are of little use in telling a doctor how to respond to an
emergency situation or a scientist how to discover something new.
&utput controls such as the amount of time a surgeon takes for each operation
or the costs of making a discovery are very crude measure of the quality of
+rgani,ational Culture and Clan Control
+rgani,ational (ulture is the shared set of beliefs e'pectations values norms
and work routines that in6uences how members of an organi,ation relate to one
another and work together to achieve organi,ational goals. Clan (ontrol is the
control e'erted on individuals and groups in an organi,ation by shared values
norms standards of behavior and e'pectations. &rgani,ational culture is an
important source of control for two reasons5
It makes control possible in situations where managers cannot use output or
behavior control.
2hen a strong and cohesive set of organi,ational values and norms is in place
the employees. decisions and actions become oriented toward helping the
organi,ation perform well.
6:dapti&e Cultures &ersus %nert Cultures
+n adapti&e (ulture controls employee attitudes and behaviors.
Their values and norms help an organi,ation to grow and change as needed
to achieve its goals.
3mployees often receive rewards linked directly to their performance.
It develops an emphasis on entrepreneurship and respect for the employee
and allows the use of organi,ational structures.
%nert (ultures lead to values and norms that fail to motivate or inspire
They lead to stagnation and often failure.
8oor working relationships develop between the organi,ation and its
employees and instrumental values of la,iness and noncooperation are
3mployees are content to be told what to do and have little incentive or
motivation to perform beyond minimum work requirements.
+rgani,ational Change
If an organi,ation does not have e1ective control over its activities it may not be
able to change or adapt in response to a changing environment.
+rgani,ational (hange is the movement of an organi,ation away from its
present state and toward some desired future state to increase its e/ciency
and e1ectiveness.
There is a fundamental tension or need to balance two opposing forces in the
control process that in6uences the way organi,ations change.
3ven though it is important to adopt the correct set of output and behavior
controls to improve e/ciency because the environment is dynamic and
uncertain employees also need to feel that they have the autonomy to depart
from routines as necessary to increase e1ectiveness.
6:ssessing the ;eed for Change
&rgani,ational change can a1ect practically all aspects of organi,ational
functioning including organi,ation structure culture strategies control
systems and groups and teams and human resource management systems as
well as critical organi,ational processes such as communication motivation
and leadership.
It can also bring alterations in the way managers carry out the critical tasks of
planning organi,ing leading and controlling and the ways they perform their
managerial roles.
<eciding how to change an organi,ation is a comple' matter because change
disrupts the status quo and poses a threat prompting employees to resist
attempts to alter work relationships and procedures.
Or"ani7ational learnin" the process through which managers try to increase
the ability of organi,ational members to understand and appropriately respond
to changing conditions can be an important impetus for change.
+ssessing the need for change calls for t'o important actiities5 re(ogni,ing
that there is a pro1lem and identif0ing its sour(e.
*ometimes the need for change is obvious but at other times problems
develop gradually making it di/cult to recogni,e that change is needed.
Thus during the frst step in the change process managers need to recogni,e
that there is a problem that requires change.
To discover the source of organi,ational problems managers need to look both
inside and outside the organi,ation.
-6e(iding on the Change to Ma2e/
&nce managers have identifed the source of the problem they must decide what
they think the organi,ation.s ideal future state would be and begin planning
how they are going to attain the organi,ation.s ideal future state.
This step also includes identifying obstacles or sources of resistance to change.
&bstacles to change are found at the corporate divisional departmental and
individual levels of the organi,ation.
!orporate-level changes even seemingly trivial ones may signifcantly a1ect
how divisional and departmental managers behave. ;or this reason an
organi,ation.s present strategy and structure can be powerful obstacles to
2hether a company.s culture is adaptive or inert facilitates or obstructs change.
&rgani,ations with entrepreneurial 6e'ible cultures are much easier to change
than organi,ations with more rigid cultures.
The same obstacles to change e'ist at the divisional and departmental levels as
o <ivision managers may di1er in their attitudes toward the changes
proposed by top managers and if their interests and power seem
threatened will resist those changes.
o 4anagers at all levels usually fght to protect their power and control over
+t the individual level people are often resistant to change because change
brings uncertainty and stress.
4anagers must recogni,e and take into consideration potential obstacles that
can make change a slow process.
Improving communication and empowering employees by inviting them to
participate in the planning for change can help overcome resistance and allay
employees. fears.
o In addition managers can sometimes overcome resistance by
emphasi,ing group or shared goals such as increased organi,ational
e/ciency and e1ectiveness.
o The larger and more comple' an organi,ation is the more comple' is the
change process.
-%mplementing the Change/
Eenerally managers introduce and manage change from the top down or from the
bottom up.
.op do#n-(hange is implemented quickly. Top managers identify the need for
change decide what to do and then move quickly to implement the changes
throughout the organi,ation.
5ottom-up (hange is typically more gradual or evolutionary5
Top managers consult with middle and frst line managers and then over
time managers at all levels work to develop a detailed plan for change.
+ ma$or advantage of bottom-up change is that it can co-opt resistance to
change from employees.
-E&aluating the Change5
The last step in the change process is to evaluate how successful the change e1ort
has been in improving organi,ational performance.
)sing such measures as market share profts or the ability of managers to
meet their goals managers can compare how well an organi,ation is performing
after the change with its performance prior to the change.
4anagers also can use 1en(hmar2ing which is the comparison of their
performance on specifc dimensions with the performance of high performing
organi,ations to decide how successful a change e1ort has been.
%enchmarking is a key tool in total quality management.
Entrepreneurship, Control, and Change
Entrepreneurs are the people who bring about change to companies and
industries because they see new and improved ways to use resources to create
products customers will want to buy. 3ntrepreneurs assume the risk associated
with starting a new business which is substantial since many new businesses fail.
They receive all of the returns or profts associated with the new business venture.
o 3mployees of e'isting organi,ations who notice opportunities for product or
service improvements and are responsible for managing the development
process are known as intrapreneurs.
o Entrepreneurship is the mobili,ation of resources to take advantage of an
opportunity to provide customers with new or improved goods and services.
o There is an interesting relationship between entrepreneurs and
intrapreneurs. 4any intrpreneurs become dissatisfed when their employers
decide not to support their new product ideas and development e1orts. Gery
often they leave their employer to start new ventures that may compete with
their previous company.
o ;requently founding entrepreneurs lack the skill patience or e'perience to
engage in the di/cult work of management. Therefore they must hire
managers who can create an operating and control system that will help the
new venture to prosper.