Chapter 10

Fundamentals of Controlling

10.1 What Is Control and Why Is It Important?

• Define controlling.
• Discuss the reasons why control is important.
• Explain the planning-controlling link.
10.2 The Control Process
• Describe the three steps in the control process.
• Explain why what is measured is more critical than how it’s
measured.
• Explain the three courses of action managers can take in
controlling.
Learning Outcomes
10.3 Controlling Organizational Performance
• Define organizational performance.
• Describe three most frequently used measures of
organizational performance.

10.4 Tools for Measuring Organizational Performance

• Contrast feedforward, concurrent, and feedback controls.
• Explain the types of financial and information controls
managers can use.
• Describe how balanced scorecards and benchmarking are
used in controlling.
 What Is Control?
• Controlling
• The process of monitoring activities to ensure that they are being
accomplished as planned and of correcting any significant deviations.

• It’s the process of monitoring, comparing, and correcting work

performance.
• Control, like a ship’s rudder, keeps the organization moving in the
proper direction.
• For example, FedEx has a performance goal of delivering 99.9 percent of
its packages on time. If on-time deliveries fall to 99.6 percent, control
systems will signal the problem to managers, so that they can make
necessary adjustments in operations to regain the target level of
performance
• The Purpose of Control
• To ensure that activities are completed in ways that lead to
accomplishment of organizational goals.
 Why Is Control Important?

• Control is important, because it’s the only way that managers know
whether organizational goals are being met and, if not, the reasons
why.
• Controlling provides a critical link back to planning. Controls let
managers know whether their goals and plans are on target and
what future actions to take.
1. Limiting the Accumulation of Error
•Small mistakes and errors do not often seriously damage the
financial health of an organization. Over time, however, small
errors may accumulate and become very serious.
•Control systems provide managers with information and feedback
on employee performance.

2. Adapting to Environmental Change A properly designed

control system can help managers anticipate, monitor, and respond
to changing circumstances
 The Control Process

• The control process is a three-step process

1. Measuring actual performance.
• the first step in control is measuring
2. Comparing actual performance against a
standard.
3. Taking action to correct deviations or inadequate
standards.
Exhibit 10–1 The Control Process
Measuring: How and What We Measure

• Sources of Information • Control Criteria (What)

(How) • Employees
• Personal observation • Satisfaction
• Turnover
• Statistical reports
• Absenteeism
• Oral reports
• Budgets
• Written reports
• Costs
• Output
• Sales
 Comparing
• Determining the degree of variation between actual performance
and the standard.
• Significance of variation is determined by:
• The acceptable range of variation from the standard
(forecast or budget).
• The size (large or small) and direction (over or under) of
the variation from the standard (forecast or budget).
Exhibit 10–3 Example of Determining Significant Variation
Cont’d
• For instance, if sales of heirloom seeds, flowering bulbs, and
annual flowers continue to be over what was expected, the
company might need to order more product from the
supplier to meet customer demand.

• As this example shows, both over variance and under

variance may require managerial attention, which is the
third step in the control process.
 Taking Managerial Action
• Managers can choose among three possible courses of action:
• Courses of Action
1. “Doing nothing”
• Only if deviation is judged to be insignificant.
2. Correcting actual (current) performance
• Immediate corrective action to correct the problem at once.
• Basic corrective action to locate and to correct the source of the
deviation.
• Corrective Actions
• Depending on what the problem is, a manager could take
different corrective actions.
• For instance, if unsatisfactory work is the reason for
performance variations, the manager could correct it by
things such as training programs, disciplinary action,
changes in compensation practices, redesign jobs
Taking Managerial Action

3. Revising the standard

• Examining the standard to ascertain whether or not the
standard is realistic, fair, and achievable.
• Upholding the validity of the standard.
• Resetting goals that were initially set too low or too high.
Exhibit 10–1 Managerial Decisions in the Control
Process
 Controlling for Organizational Performance

• What Is Performance?
• The end result of an activity
• What Is Organizational Performance?
• The accumulated end results of all of the organization’s work
processes and activities
• Designing strategies, work processes, and work activities.
• Coordinating the work of employees helps to improve the
organizational performance.
 Organizational Performance Measures
• Organizational Productivity
• Productivity: the overall output of goods and/or services divided
by the inputs needed to generate that output.
• Output: sales revenues
• Inputs: costs of resources (materials, labor expense, and
facilities)
• Ultimately, productivity is a measure of how efficiently
employees do their work.
• firms want to produce the most goods and services using the least
amount of inputs
 Tools for Measuring Organizational Performance
1. Feedforward Control
• A control that prevents anticipated problems before actual
occurrences of the problem.
• Building in quality through design.
• Requiring suppliers conform to ISO 9002.
• example the scheduled preventive maintenance programs on
aircraft done by the major airlines.
2. Concurrent Control
• A control that takes place while the monitored activity is in
progress.
• Direct supervision: management by walking around.
• For example, you’ve probably experienced this with word-
processing software that alerts you to a misspelled word or
incorrect grammatical usage.
 Tools for Measuring Organizational Performance (cont’d)

• Feedback Control
• A control that takes place after an activity is done.
• Corrective action is after-the-fact, when the problem has
already occurred.
• Advantages of feedback controls:
• Provide managers with information on the effectiveness of
their planning efforts.
• Enhance employee motivation by providing them with
information on how well they are doing.
Exhibit 10–2 Types of Control
 Financial Controls

• Every business wants to earn a profit. To achieve this goal, managers

need financial control
• Businesses must manage their finances so that revenues are sufficient to
cover costs and still return a profit to the firm’s owners.
• Traditional Controls
• Ratio analysis
• Liquidity
• Leverage
• Activity
• Profitability
• Budget Analysis Budgets are planning and control tools
• Quantitative standards
• Deviations
 Exhibit 10–3 Popular Financial Ratios

Objective Ratio Calculation Meaning

 Exhibit 10–4 Popular Financial Ratios (cont’d)

Objective Ratio Calculation Meaning

 Tools for Measuring Organizational Performance (cont’d.)
• Balanced Scorecard is a way to evaluate organizational
performance from more than just the financial perspective.
• Is a measurement tool that uses goals set by managers in
following areas to measure a company’s performance:
1. Financial
2. Customer satisfaction
3. Internal processes improvement
• Is intended to emphasize that all of these areas are important
to an organization’s success and that there should be a balance
among them.
 Information Controls
• Purposes of Information Controls
• As a tool to help managers control other organizational activities.
• Managers need the right information at the right time and in
the right amount.
• Managers must have comprehensive and secure controls in place
to protect the organization’s important information.
• Most of the information tools managers use come from the
organization’s management information system.
• In measuring actual performance, managers need information
about what is happening within their area of responsibility
and about the standards in order to be able to compare
actual performance with the standards.
Management Information Systems (MIS)

• A system used to provide management with needed

information on a regular basis.
• Data: an unorganized collection of raw, unanalyzed facts
(e.g., unsorted list of customer names).
• Information: data that has been analyzed and organized
such that it has value and relevance to managers.
• Further, an MIS focuses specifically on providing managers
with information (processed and analyzed data), not merely
data (raw, unanalyzed facts)
Benchmarking of Best Practices

• Benchmark
• The standard of excellence against which to measure and
compare.
• Benchmarking
• Is the search for the best practices among competitors or
noncompetitors that lead to their superior performance.
• Is a control tool for identifying and measuring specific
performance gaps and areas for improvement.
 Resistance to Control

• Many employees resist control, especially if they feel over controlled,

if they think control is inappropriately focused or rewards
inefficiency, or if they are uncomfortable with accountability.
1.Overcontrol- Occasionally, organizations try to control too many
things.
This becomes especially problematic when the control directly affects
employee behavior.
An organization that instructs its employees
• when to come to work,
• where to park,
• when to have morning coffee, and
• when to leave for the day
exerts considerable control over people’s daily activities
2. Inappropriate Focus

• The control system may be too narrow, or it may focus too much
on quantifiable variables and leave no room for analysis or
interpretation.
• A university reward system that encourages faculty members to
publish large numbers of articles but fails to consider the
quality of the work is also inappropriately focused
 3. Too Much Accountability
• Effective controls allow managers to determine whether
employees successfully discharge their responsibilities.
• If standards are properly set and performance accurately
measured, managers know when problems arise and which
departments and individuals are responsible
• People who do not want to be answerable for their mistakes
or who do not want to work as hard as their boss might like
therefore resist control.
 Overcoming Resistance to Control

• Perhaps the best way to overcome resistance to control is to

create effective control.
• If control systems are properly integrated with organizational
planning and if the controls are flexible, accurate, timely, and
objective, the organization will be less likely to over control, to
focus on inappropriate standards, or to reward inefficiency.

Two other ways to overcome resistance are:

1. Encourage Employee Participation
• when employees are involved with planning and implementing the
control system, they are less likely to resist it
2. Develop Verification Procedures

• Multiple standards and information systems provide checks and

balances in control and allow the organization to verify the
accuracy of performance indicators.

• Suppose that an employee who was fired for excessive absences

argues that he was not absent “for a long time.”
• An effective human resource control system should have records
that support the termination
.

End of the course

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