16 - 1

Chapter

16 Managerial Control

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 16 - 2
Introduction

 Control
 any process that directs the activities of individuals toward the
achievement of organizational goals
 planning and controlling are interdependent
 effective planning facilitates control
 control facilitates planning
 three broad strategies for organizational control
 bureaucratic - use of rules, regulations, and formal authority
 market - use of pricing mechanisms to regulate activities
 clan - employees share organizational values and act in
accordance with them
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 16 - 3
Characteristics Of Controls

System control Features and requirements

Bureaucratic control Uses formal rules, standards, hierarchy, legitimate

authority. Works best where tasks are certain and
workers are independent.

Market control Uses prices, competition, profit centers, exchange

relationships. Works best where tangible output can
be identified and market can be established between
parties.

Clan control Involves culture, shared values, beliefs, expectations,

and trust. Works best where there is “no one best
way” to do a job and where employees are
empowered to make decisions.
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 16 - 4
The Control Process

Set
Measure Determine
performance Compare
performance deviation
standards

Within
Standards
limits

Take
corrective No Yes
action

Continue
work
progress
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 16 - 5
Bureaucratic Control Systems

 The control cycle

 Step 1: setting performance standards
 standard - expected performance for a given goal
 target that establishes a desired performance level, motivates
performance, and serves as a benchmark against which actual
performance is assessed
 can be set for any activity
 should be specific, measurable, challenging, and established to
improve performance
 typically is derived from job requirements
 set with respect to quantity, quality, time, and cost

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 16 - 6
Bureaucratic Control Systems (cont.)

 The control cycle (cont.)

 Step 2: measuring performance
 performance data obtained from three sources
 written reports
 oral reports
 personal observation

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 16 - 7
Bureaucratic Control Systems (cont.)

 The control cycle (cont.)

 Step 3: comparing performance with the standard
 evaluation of the performance
 for some activities, small deviations from the standard are
acceptable
 for other activities, a slight deviation may be serious
 principle of exception - control is enhanced by concentrating on the
significant deviations from the standard
 only exceptional cases require corrective action

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 16 - 8
Bureaucratic Control Systems (cont.)

 The control cycle (cont.)

 Step 4: taking corrective action
 ensures that operations are adjusted where necessary to achieve
the initially planned results
 type of corrective action depends on the nature of the problem
 higher-ups can take corrective action
 operator at the point of the problem can take corrective action
 specialist control - engineering specialist

 operator control - multiskilled operators can rectify their own

problems

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 16 - 9
Bureaucratic Control Systems (cont.)

 Approaches to bureaucratic control

 feedforward (preliminary) control - control process used before
operations begin
 future oriented
 prevent problems before they occur
 includes policies, procedures, and rules
 concurrent control - control process used while plans are being
carried out
 the heart of any control system
 directing, monitoring, and fine-tuning activities as they are occur
 advances in information technology have created powerful concurrent
controls

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 16 - 10
Bureaucratic Control Systems (cont.)

 Approaches to bureaucratic control (cont.)

 feedback control - control that focuses on the use of
information about previous results to correct deviations from
the acceptable standard
 implies that performance data were gathered and analyzed
 results used to make corrections
 timing is an important aspect of feedback control
 some feedback processes are under real-time (concurrent) control

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 Relationship Between Sigma Level 16 - 11

And Defects/Million Opportunities

Sigma level DPMO Examples of four sigma quality

2 308,537 20,000 lost articles of mail per hour

3 66,807 Unsafe drinking water 15 minutes per day

4 6,210 5,000 incorrect surgical operations per week
5 233
200,000 wrong prescriptions each year
6 3.4
No electricity for 7 hours each month

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 16 - 12
Bureaucratic Control Systems (cont.)

 Management audits
 evaluation of the effectiveness and efficiency of various systems
within an organization
 external audit - evaluation conducted by one organization, such as
a CPA firm, on another
 may conduct external audit of a competitor for strategic decision-
making purposes
 useful for feedback and feedforward control
 internal audit - periodic assessment of a company’s own
planning, organizing, leading, and controlling processes
 assess what the company has done for itself and its customers
 reviews the company’s past, present, and future
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 16 - 13
Bureaucratic Control System (cont.)

 Budgetary control
 most widely recognized and commonly used method of
managerial control
 budgeting - process of investigating what is being done and
comparing the results with the corresponding budget data
 used to verify accomplishments or remedy differences
 fundamental budgetary considerations - begins with an estimate
of sales and expected income
 budgeting information is supplied to the entire company or any of its
units
 not confined to financial matters
 budgets prepared for a definite time period
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 16 - 14
Bureaucratic Control System (cont.)

 Budgetary control (cont.)

 fundamental budgetary considerations (cont.)
 budgetary control proceeds through several stages
 establishing expectancies - starts with the broad company plan and
sales estimates
 ends with budget approval and publication

 budgetary operations - find out what is being accomplished and

compare the results with expectancies
 taking corrective action (if necessary)

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 16 - 15
Types Of Budgets

Sales
(prepared by month,
area, or product)

Master Production
(all major business (expressed in
activities) Budget physical units)
focuses
on:

Cash Cost production

(anticipated receipts (compare costs
and expenses) with sales price)
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 16 - 16
Bureaucratic Control System (cont.)

 Accounting audits
 procedures used to verify accounting reports and statements
 performed by an outside firm of public accountants

 Activity-based costing (ABC)

 cost accounting method that identifies streams of activity
 employees break down what they do to define basic activities

 total expenses computed by traditional accounting

 total amounts spread over the activities according to time spent on

each
 provides an accurate picture of how costs should be charged

 highlights where wasted activities are occurring

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 16 - 17
Bureaucratic Control System (cont.)

 Financial controls
 balance sheet - report that shows the financial picture of a
company at a given time
 itemizes:
 assets - the values of various items the corporation owns
 liabilities - the amounts the corporation owes to various creditors
 stockholders’ equity - amount accruing the corporation’s owners

Assets = Liabilities + Stockholders’ equity

 shows trends over time
 gives managers insight into overall performance
 identifies areas which require adjustments
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 16 - 18
Bureaucratic Control System (cont.)

 Financial controls (cont.)

 profit and loss statement - itemized financial statement of the
income and expenses of a company’s operations
 comparisons of profits and losses can identify trouble areas
 a common control for the enterprise as a whole
 may be used at the division and department level

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 16 - 19
Bureaucratic Control System (cont.)

 Financial controls (cont.)

 financial ratios - indicate possible strengths and weaknesses
 calculated from selected items on the profit and loss statement
and the balance sheet
 liquidity ratios - indicate the ability to pay short-term debts
 current ratio - indicates the extent to which short-term assets can
decline and still be adequate to pay short-term liabilities
 leverage ratios - show the relative amount of funds in the
business supplied by creditors and shareholders
 debt-equity ratio - indicates the company’s ability to meet its long-
term financial obligations

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 16 - 20
Bureaucratic Control System (cont.)

 Financial controls (cont.)

 financial ratios (cont.)
 profitability ratios - indicate management’s ability to generate a
financial return on sales or investment
 return on investment (ROI) - ratio of profit to capital used
 rate of return from capital

 using financial ratios - exclusive reliance on financial ratios can

have negative consequences including:
 management myopia - focus on short-term earnings and profits at
the expense of longer-term strategic obligations
 relegating other important considerations to a secondary position
 ratios should be supplemented with other control measures

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 16 - 21
Bureaucratic Control System (cont.)

 Downside of bureaucratic control

 control system can lead to dysfunctional behavior
 rigid bureaucratic behavior - acting in ways that make one look
good on the control system’s measures
 may result in rigid, inflexible behavior geared toward doing only
what the system requires
 stay out of trouble by following the rules
 tactical behavior - behavior aimed at “beating the system”
 manipulate or falsify performance data
 falsify their predictions or requests for the future
 concern about individual rather than organizational performance

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 16 - 22
Bureaucratic Control System (cont.)

 Downside of bureaucratic control (cont.)

 control system can lead to dysfunctional behavior (cont.)
 resistance to control
 control systems increase the accuracy of performance data and make
employees more accountable for their actions
 control system can change expertise and power structures
 control system can change the social structure
 control system may be perceived as an invasion of privacy

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 16 - 23
Bureaucratic Control System (cont.)

 Designing effective control systems

 establish valid performance standards
 most effective standards expressed in quantitative terms
 measures should not be easily faked or sabotaged
 system should incorporate all important aspects of performance
 too many measures create overcontrol and employee resistance
 system has stated tolerance ranges
 provide adequate information
 employees must understand the importance and nature of the control
system
 people need feedback about performance
 information should be accessible

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 16 - 24
Bureaucratic Control System (cont.)

 Designing effective control systems (cont.)

 ensure acceptability to employees
 systems have useful performance standards
 overcontrol is not an issue
 believe the standards are possible to achieve
 emphasize positive behavior rather than focusing on controlling
negative behavior alone
 standards are established participatively
 use multiple approaches
 include both financial and nonfinancial performance goals
 incorporate aspects of feedforward, concurrent, and feedback control

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 The Other Controls: Markets And 16 - 25

Clans
 Market control
 involves the use of economic forces - and the pricing mechanisms
that accompany them - to regulate performance
 where output from any organizational unit has value to others, a price

can be negotiated for its exchange

 as a market for these transactions becomes established:

 price becomes an indicator of the value of the product or service

 price competition effectively controls performance
 market controls at the corporate level
 used to regulate independent business units
 business units treated as competing profit centers
 profit and loss data used to evaluate performance

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 The Other Controls: Markets And 16 - 26

Clans (cont.)
 Market control (cont.)
 market controls at the business unit level
 regulates exchange among departments and functions
 transfer price - price charged by one unit in the organization for
a product or service that it supplies to another unit of the same
organization
 ideally, reflects the price that the receiving business unit would have
to pay for that product or service in the marketplace
 provide natural incentives to keep costs down when organization
has the option to outsource products and services to external
partners

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 The Other Controls: Markets And 16 - 27

Clans (cont.)
 Market control (cont.)
 market controls at the individual level
 market rate is often the best indicator of an employee’s potential
worth
 provide a natural incentive for employees to enhance their skills
and offer them to potential firms
 boards of directors use market controls to manage CEOs
 incentives on top of base salary include:
 bonus tied to short-term profit targets

 long-term incentives linked to the firm’s share price, usually

through stock options

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 16 - 28
Examples Of Market Control

CEO uses market

controls to evaluate
performance of business
unit heads
CEO/
President Managers use transfer
pricing to establish
values for internal
transactions among
units

Business Business Business Business

unit unit unit unit
manager manager manager manager

Market rates determine

the base wage/salary for
managers and employees

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 The Other Controls: Markets And 16 - 29

Clans (cont.)
 Clan control: the role of empowerment and culture
 bureaucratic and market controls are no longer sufficient because:
 employees’ jobs have changed
 the nature of management has changed
 the employment relationship has changed
 empowerment - has become a necessary aspect of a manager’s
repertoire of control
 employees trusted to act in the best interests of the firm
 does not mean giving up management control
 clan control - create relationships built on mutual respect
 encourage each person to take responsibility for her/his actions

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 Management Control In An 16 - 30

Empowered Setting

1. Put control where the operation is

2. Use “real time” rather than after-the-fact controls
3. Rebuild the assumptions underlying management
control to build on trust rather than distrust
4. Move to control based on peer norms
5. Rebuild the incentive systems to reinforce
responsiveness and teamwork

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 The Other Controls: Markets And 16 - 31

Clans (cont.)
 Clan control (cont.)
 understanding culture’s role in control
 organization culture - the foundation of clan control
 set of important assumptions about the organization and its goals and
practices that members of the company share
 provides a framework that organizes and directs people’s behavior
on the job
 strong culture - everyone understands and believes in the firms’
goals, priorities, and practices
 weak culture - different people hold different values
 confusion about corporate goals

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 The Other Controls: Markets And 16 - 32

Clans (cont.)
 Clan control (cont.)
 diagnosing culture - clues about culture
 corporate mission statements and official goals
 business practices
 symbols, rites and ceremonies
 the stories people tell
 cultures can be categorized according to whether they emphasize
flexibility versus control and whether their focus is internal or
external to the organization

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 16 - 33
Competing Values Model Of Culture

Flexible
Processes

Group Adhocracy

Internal External
Maintenance Positioning

Hierarchy Rational

Control-Oriented
Processes
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 The Other Controls: Markets And 16 - 34

Clans (cont.)
 Clan control (cont.)
 diagnosing culture (cont.)
 general cultures can be categorized
 group culture
 dominant attribute: cohesiveness, participation, teamwork, sense of
family
 leadership style: mentor, facilitator, parent-figure
 bonding: loyalty, tradition, interpersonal cohesion
 strategic emphasis: toward developing human resources,
commitment, and morale

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 The Other Controls: Markets And 16 - 35

Clans (cont.)
 Clan control (cont.)
 diagnosing culture (cont.)
 adhocracy
 dominant attribute: entrepreneurship, creativity, adaptability,
dynamism
 leadership style: innovator, entrepreneur, risk taker
 bonding: flexibility, risk, entrepreneur
 strategic emphasis: toward innovation, growth, new resources

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 The Other Controls: Markets And 16 - 36

Clans (cont.)
 Clan control (cont.)
 diagnosing culture (cont.)
 hierarchy
 dominant attribute: order, rules and regulations, uniformity,
efficiency
 leadership style: coordinator, organizer, administrator
 bonding: rules, policies and procedures, clear expectations
 strategic emphasis: toward stability, predictability, smooth

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 The Other Controls: Markets And 16 - 37

Clans (cont.)
 Clan control (cont.)
 diagnosing culture (cont.)
 rational
 dominant attribute: goal achievement, environment exchange,
competitiveness
 leadership style: production and achievement-oriented, decisive
 bonding: goal orientation, production, competition
 strategic emphasis: toward competitive advantage and market
superiority

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 The Other Controls: Markets And 16 - 38

Clans (cont.)
 Clan control (cont.)
 managing culture to reinforce clan control
 approaches to managing culture
 corporate leadership should espouse lofty ideals and visions for the
company that will inspire the organization’s members
 executives must be attentive to the mundane details of daily affairs
 top management must behave appropriately during moments of truth
when hard choices have to be made
 top management must celebrate and reward those who exemplify the
new values
 clan control is a “double edged sword”
 takes a long time to develop and even longer to change
 if change is advisable, must unlearn old values and embrace the new
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