Topic 7 Managerial Control Method

Managerial
Control
Chapter Sixteen
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Quote
“More than at any time in the past, companies

will not be able to hold themselves together
with the traditional methods of control:
hierarchy, systems, budgets, and the like. . . . The
bonding glue will increasingly become
ideological.
Collins and Porras

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
2
Learning Objectives
LO 1 Explain why companies develop control systems for
employees.
LO 2 Summarize how to design a basic bureaucratic control system.
LO 3 Describe the purposes for using budgets as a control device.
LO 4 Define basic types of financial statements and financial ratios
used as controls.
LO 5 List procedures for implementing effective control systems.
LO 6 Identify ways in which organizations use market control
mechanisms.
LO 7 Discuss the use of clan control in an empowered organization.
3
Managerial Control
• Control
– Any process that directs the activities of
individuals toward the achievement of
organizational goals.
4
Symptoms of an
Out-of-Control Company
Exhibit 16.1
5
Managerial Control
Bureaucratic control
• The use of rules, regulations, and authority to
guide performance.
Market control
• Control based on the use of pricing mechanisms
and economic information to regulate activities
within organizations.
Clan control
• Control based on the norms, values, shared goals,
and trust among group members.
6
The Control Cycle
Setting performance
standards.
Taking action to
correct problems Measuring
and reinforce performance.
successes.
Comparing
performance against
the standards and
determining
deviations.
7
Setting Performance Standards
Standard
• Expected performance for a given goal:
a target that establishes a desired
performance level, motivates
performance, and serves as a
benchmark against which actual
performance is assessed.
8
Measuring Performance
Written reports
Oral reports
Personal observation
9
Comparing Performance with
the Standard
• A managerial principle stating that

Principle control is enhanced by
of concentrating on the exceptions to
exception or significant deviations from the
expected result or standard.
10
After-action review
• After-action review
– A frank and open-minded discussion of four basic
questions aimed at continuous improvement.
Exhibit 16.4
11
Approaches to Bureaucratic Control
Feedforward control
• The control process used before operations begin, including
policies, procedures, and rules designed to ensure that
planned activities are carried out properly.
Concurrent control
• The control process used while plans are being carried out,
including directing, monitoring, and fine-tuning activities as
they are performed.
Feedback control
• Control that focuses on the use of information about previous
results to correct deviations from the acceptable standard.
12
Social Enterprise
Beyond Counting: Alternative Ways to Measure
Social Impact
• Many social enterprises measure their impact by
counting the number of people they serve.
• Despite its popularity, counting outcomes is an
incomplete measure.
• Measures beyond counting are being developed
and include the following.
– Impact value chain (IVC).
– Progress Out of Poverty Index (PPI).
– B Impact Assessment (BIA).
13
Social Enterprise Questions
Beyond Counting: Alternative Ways to Measure
Social Impact
• Assume the role of Devil's advocate: Why is
counting outcomes an adequate way of assessing
a social enterprise's social impact?
• If you ran a social enterprise to reduce poverty in
India, which of the three measures (IVC, PPI, or
BIA) would you likely use to measure your
enterprise's social impact?
14
The Role of Six Sigma
At a six-sigma level, a process is producing fewer

than 3.4 defects per million, which means it is
operating at a 99.99966 percent level of accuracy.
Six Sigma companies have close to zero defects,

substantially lower production costs and much
higher levels of customer satisfaction.
15
The Role of Six Sigma
Exhibit 16.5
16
Question
___________ is an evaluation of the
effectiveness and efficiency of various systems
within an organization.
A. External audit
B. Internal audit
C. Management audit
D. HR Audit
17
Management Audits
External audit
Management An evaluation conducted by
audit one organization, such as a
An evaluation of CPA firm, on another.
the effectiveness
and efficiency of Internal audit
various systems A periodic assessment of a
within an company’s own planning,
organization. organizing, leading, and
controlling processes.
18
Management Audits (Continued)
Internal Audit
• Assesses what the company has done for itself.
• What it has done for its customers or other recipients of its
goods or services.
External Audit
• Investigates other organizations for possible merger or
acquisition.
• Determines the soundness of a company that will be used
as a major supplier.
• Discovers the strengths and weaknesses of a competitor to
maintain or better exploit the competitive advantage of
the investigating organization.
19
Budgetary Controls
• Budgeting
– The process of investigating what is being done
and comparing the results with the corresponding
budget data to verify accomplishments or remedy
differences.
– Also called budgetary controlling.
20
A Sales-Expense Budget
Exhibit 16.6
21
Types of Budgets
Sales Production
Cost Cash
Capital Master
22
Types of Budgets
• Accounting audits
– Procedures used to
verify accounting
reports and
statements.
23
Activity-Based Costing
• A method of cost accounting designed to
identify streams of activity and then to
allocate costs across particular business
processes according to the amount of time
employees devote to particular activities.
24
Activity-Based Costing
Example: ABC Medical Clinic
Exhibit 16.7
25
Financial Controls
• Balance sheet
– A report that shows the financial picture of a
company at a given time and itemizes assets,
liabilities, and stockholders’ equity.
Assets = Liabilities + Stockholders’ equity
26
Financial Controls
• Assets
– The values of the various items the corporation
owns.
• Liabilities
– The amounts a corporation owes to various
creditors.
• Stockholders’ equity
– The amount accruing to the corporation’s owners.
27
The Profit and Loss Statement
• Profit and loss statement
– An itemized financial statement of the income and
expenses of a company’s operations.
– Controlling by profit and loss is most commonly
used for the entire enterprise and, in the case of a
diversified corporation, its divisions.
28
The Profit and Loss Statement
Exhibit 16.9
29
Financial Ratios
Current ratio Debt-equity ratio

• A liquidity ratio that • A leverage ratio that
indicates the extent to indicates the company’s
which short term assets ability to meet its long-
can decline and still be term financial
adequate to pay short- obligations.
term liabilities.
Return on investment
• A ratio of profit to capital used, or a rate of
return from capital.
30
Question
___________ is focusing on short-term earnings
and profits at the expense of longer-term
strategic obligations.
A. Management amblyopia
B. Personnel myopia
C. Management myopia
D. Short-sighted angst
31
Using Financial Ratios
• Management myopia
– Focusing on short-term
earnings and profits at
the expense of longer-
term strategic
obligations.
32
The Downside of Bureaucratic Control
Rigid bureaucratic behavior
Tactical behavior
Resistance to control
33
Designing Effective Control Systems
Provide
Establish Ensure
adequate
valid acceptability
information
performance to
to
standards. employees.
employees.
Maintain open Use multiple

communication. approaches.
34
Balanced Scorecard
• A control system combining four sets of
performance measures.
– Financial.
– Customer.
– Business process.
– Learning and growth.
35
Examples of Market Control
Exhibit 16.11
36
Guidelines for Managing in an
Empowered World
Put control where the operation is.
Use real-time rather than after-the-fact controls.
Rebuild the assumptions underlying management

control to build on trust rather than distrust.
Move to control based on peer norms.
Rebuild the incentive systems to reinforce

responsiveness and teamwork.
37
Management in Action - Onward
Was ROWE a Problem for Best Buy – or Part of
the Solution?
• When Hubert Joly became Best Buy’s CEO, he
focused operating efficiently. He found the
company’s ROWE program inconsistent with his
approach.
• The Results Oriented Work Environment (ROWE)
program was developed to promote employee
discussion of goals and work arrangements with their
manager.
38
Management in Action - Questions
Was ROWE a Problem for Best Buy – or Part of
the Solution?
• How well did ROWE meet the criteria of an
effective performance system? Will
eliminating it be more or less effective? Why?
• How can clan control help Best Buy improve
its performance?
39

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Managerial

“More than at any time in the past, companies

Collins and Porras

• A managerial principle stating that

At a six-sigma level, a process is producing fewer

Six Sigma companies have close to zero defects,

Assets = Liabilities + Stockholders’ equity

Current ratio Debt-equity ratio

Rigid bureaucratic behavior

Maintain open Use multiple

Use real-time rather than after-the-fact controls.

Rebuild the assumptions underlying management

Rebuild the incentive systems to reinforce

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