Chapter Twenty

Basic Elements of
Control

Slide content created by Charlie Cook, The University of West Alabama

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 Learning Objectives
After studying this chapter, you should be able to:
1. Explain the purpose of control, identify different types of
control, and describe the steps in the control process.
2. Identify and explain the three forms of operations control.
3. Describe budgets and other tools for financial control.
4. Identify and distinguish between two opposing forms of
structural control.
5. Discuss the relationship between strategy and control,
including international strategic control.
6. Identify characteristics of effective control, why people
resist control, and how managers can overcome this
resistance.

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 The Nature of Control in
Organizations
• Control
– The regulation of organizational activities so that
some targeted element of performance remains
within acceptable limits.
• Benefits of Control
– Provides organizations with indications of how well
they are performing in relation to their goals.
– Provides a mechanism for adjusting performance
to keep organizations moving in the right direction.

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 Figure 20.1: The Purpose of
Control

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 The Nature of Control in
Organizations (cont’d)
• Types of Controls
– Areas of Control
• Physical resources—inventory management, quality
control, and equipment control.
• Human resources—selection and placement, training and
development, performance appraisal, and compensation.
• Information resources—sales and marketing forecasts,
environmental analysis, public relations, production
scheduling, and economic forecasting.
• Financial resources—managing capital funds and cash
flow, collection and payment of debts.

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 Figure 20.2: Levels of Control

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 The Nature of Control in
Organizations (cont’d)
• Types of Controls
(cont’d)
– Responsibilities for
Control
• Controller—a position
in organizations that
helps line managers
with their control
activities.

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 Figure 20.3: Steps in the
Control Process

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 The Nature of Control in
Organizations (cont’d)
• Steps in the Control Process (cont’d)
– Establish standards
• Control standard—a target against which subsequent
performance will be compared.
– Should be expressed in measurable terms.
– Should be consistent with organizational goals.
– Should be identifiable indicators of performance.

– Measure performance
• Performance measurement is a constant, ongoing process.
• Performance measures must be valid indicators (e.g., sales,
costs, units produced) of performance.

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 The Nature of Control in
Organizations (cont’d)
• Steps in the Control Process (cont’d)
– Compare performance against standards
• Define what is a permissible deviation from the
performance standard.
• Utilize the appropriate timetable for measurement.
– Consider corrective action
• Maintain the status quo (do nothing).
• Correct the deviation to bring operations into compliance
with the standard.
• Change the standard if it was set too high or too low.

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 Figure 20.4: Forms of
Operations Control

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 Financial Control
• Financial Control
– Control of financial resources
(revenues, shareholder
investments) as they:
• Flow into the organization
revenues
• Are held by the organization as
working capital, retained
earnings
• Flow out of the organization as
payment of expenses

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 Financial Control (cont’d)
• Budgetary Control
– Budgets
• May be established at any organizational level.
• Are typically for one year or less.
• May be expressed in financial terms, units of output, or other
quantifiable factors.
– Purposes of budgets
• Help managers coordinate resources and projects.
• Help define the established standards for control.
• Provide guidelines about the organization’s resources and
expectations.
• Enable the organization to evaluate the performance of
managers and organizational units.

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 Table 20.1: Developing
Budgets in Organizations

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 Figure 20.5: Developing
Budgets in Organizations

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 Financial Control (cont’d)
Strengths and Weaknesses of Budgeting
• Strengths • Weaknesses
– Budgets facilitate effective
operational controls. – Budgets can hamper
– Budgets facilitate coordination operations if applied too
and communication between rigidly.
departments.
– Budgets can be time
– Budgets establish records of
organizational performance,
consuming to develop.
which can enhance planning. – Budgets can limit
– Budgets link plans and control innovation and change.
as part of plans and then
serving as part of control

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 Other Tools of
Financial Control
• Financial Statements
– Financial statement
• A profile of some aspect of an organization’s financial
circumstances.
– Balance sheet
• A listing of assets (current and fixed), liabilities (short- and
long-term), and stockholders’ equity at a specific point in time
(typically, year-ending) that summarizes the financial
condition of the organization.
– Income statement
• Summary of financial performance—revenues less expenses
as net income (i.e., profit or loss)—over a period of time,
usually one year.

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 Other Tools of
Financial Control (cont’d)
• Ratio Analysis
– The calculation of one or more financial ratios to assess
some aspect of the organization’s financial health.
• Liquidity ratios
• Debt ratios
• Operating ratios
• Financial Audit
– An independent appraisal of an organization’s
accounting, financial, and operational systems.
• External audits
• Internal audits

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 Structural Control
• Bureaucratic Control
– A form of organizational
control characterized by
formal and mechanistic
structural arrangements.
• Decentralized control
– An approach to organizational
control based on informal and
organic structural
arrangements.

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 Figure 20.6:
Organizational Control

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 Strategic Control
• Integrating Strategy and Control
– Strategic control
• Is aimed maintaining an effective alignment with the
environment and moving toward achieving strategic goals.
• Focuses on structure, leadership, technology, human
resources, and informational and operational systems.
• Focuses on the extent to which implemented strategy
achieves the organization’s goals.
– International Strategic Control
• Focuses on whether to manage the global organization from
a centralized or decentralized perspective.
– Centralization creates more control and coordination, whereas
decentralization fosters adaptability and innovation.

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 Managing Control in
Organizations
• Characteristics of Effective Control
– Integration with planning
– Flexibility
– Accuracy
– Timeliness
– Objectivity

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 Managing Control in
Organizations (cont’d)
• Resistance to Control Due To:
– Overcontrol
– Inappropriate Focus
– Rewards for Inefficiency
– Too much accountability

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 Overcoming
Resistance to Control
• Resistance to control can be overcome by:
– Designing controls integrated with organizational
planning and aligned with goals and standards.
– Creating flexible, accurate, timely, and objective controls.
– Avoiding overcontrol in the implementation of controls.
– Guarding against controls that reward inefficiencies.
– Encouraging employee participation in the planning and
implementing of control systems.
– Developing a system of checks and balances that can
verify the accuracy of performance indicators.

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 Key Terms
• control • financial statement
• operations control
• financial control • balance sheet
• structural control • income statement
• strategic control
• ratio analysis
• controller
• control standard • audits
• preliminary control • bureaucratic control
• screening control
• postaction control • decentralized
• budget control

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