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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Chapter 16
Prepared byDeborah Baker
Texas Christian University
Management4th Edition
Chuck Williams
Control
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
What Would You Do?
Walgreens has been an exceptional investment, but past performance is no guarantee of future performance
Competition is increasing—from warehouse discounters, CVS, Wal-Mart, and PBM mail-order pharmacies
Non-prescription goods account for 33 percent of Walgreen’s sales
Walgreens’ Headquarters, Deerfield, Illinois.
How can Walgreen continue to grow same store sales? What can it do about its competition?
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Basics of Control
After reading this section, you should be able to:
1. describe the basic control process.
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Control Process
Begins with establishment of clear standards of performance
Begins with establishment of clear standards of performance
Involves a comparison of actual performance to desired performance
Involves a comparison of actual performance to desired performance
Takes corrective action to repair performance deficiencies
Takes corrective action to repair performance deficiencies
Is a dynamic, cybernetic processIs a dynamic, cybernetic process
Consists of feedback control, concurrent control, feedforward control
Consists of feedback control, concurrent control, feedforward control11
But… controlisn’t always
worthwhile or possible
But… controlisn’t always
worthwhile or possible
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Setting Standards
1. A good standard must enable goal achievement.
2. Listening to customers or observing competitors.
3. Benchmarking other companies. Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies’
performance standards.
1.11.1
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Comparison to Standards
1. Compare actual performance to performance standards.
The use of “secret shoppers” helps verify that performance standards are being met.
1.21.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Corrective Action
Identify performance deviations
Analyze those deviations
Develop and implement programs to correct them
1.31.3
ControlControlProcessProcessControlControlProcessProcess
CorrectCorrect
IdentifyIdentify
Analyze
Analyze
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Dynamic, Cybernetic Process
Adapted from Exhibit 16.1
1.41.4
Develop & ImplementProgram for
Corrective Action
Develop & ImplementProgram for
Corrective Action
Set StandardsSet Standards
Measure Performance
Measure Performance
Compare withStandards
Compare withStandards
IdentifyDeviations
IdentifyDeviations
AnalyzeDeviations
AnalyzeDeviations
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Feedback, Concurrent, and Feedforward Control
FeedbackControl
FeedbackControl
Gather information about performancedeficiencies after they occur
Gather information about performancedeficiencies after they occur
ConcurrentControl
ConcurrentControl
Gather information about performancedeficiencies as they occur
Gather information about performancedeficiencies as they occur
FeedforwardControl
FeedforwardControl
Monitor performance inputs ratherthan outputs to prevent or minimizeperformance deficiencies before they occur
Monitor performance inputs ratherthan outputs to prevent or minimizeperformance deficiencies before they occur
1.51.5
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Feedforward Control
Guidelines for Using Feedforward Control
1. Thorough planning and analysis are required.
2. Careful discrimination must be applied in selecting input variables.
3. The feedforward system must be kept dynamic.
4. A model of the control system should be developed.
5. Data on input variables must be regularly collected.
6. Data on input variables must be regularly assessed.
7. Feedforward control requires action.
1. Thorough planning and analysis are required.
2. Careful discrimination must be applied in selecting input variables.
3. The feedforward system must be kept dynamic.
4. A model of the control system should be developed.
5. Data on input variables must be regularly collected.
6. Data on input variables must be regularly assessed.
7. Feedforward control requires action.
Adapted from Exhibit 16.2
1.51.5
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Control Loss
Is control
worthwhile?
Maybe, maybe
not.
Managers mustassess the regulation costs and the cybernetic feasibility.
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Control Methods
After reading these sections, you should be able to:
2. discuss the various methods that managerscan use to maintain control.
3. describe the behaviors, processes, and outcomesthat today’s managers are choosing to controltheir organizations.
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Control Methods
NormativeNormative ConcertiveConcertive Self-ControlSelf-Control
BureaucraticBureaucratic ObjectiveObjective
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Bureaucratic Control
Top-down control
Use rewards and punishment to influence employee behaviors
Use policies and rules to control employees
Often inefficient and highly resistant to change
2.12.1
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Objective Control
2.22.2
ObjectiveControl
ObjectiveControl
Use of observable measures of workerbehavior or outputs to assessperformance and influence behavior
Use of observable measures of workerbehavior or outputs to assessperformance and influence behavior
BehaviorControl
BehaviorControl
Regulation of the behaviors andactions that workers perform on the job
Regulation of the behaviors andactions that workers perform on the job
OutputControl
OutputControl
Regulation of workers’ results oroutputs through rewards andincentives
Regulation of workers’ results oroutputs through rewards andincentives
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Doing the Right Thing
Don’t Cheat on Travel Expense Reports
Workers are often tempted to pad their travelexpense reports
It’s often justified by feeling that they are entitled
If you can’t trust an employee to be truthfulon an expense report, how can you trust them with decisions involving millions of dollars?
Don’t Cheat on Travel Expense Reports
Workers are often tempted to pad their travelexpense reports
It’s often justified by feeling that they are entitled
If you can’t trust an employee to be truthfulon an expense report, how can you trust them with decisions involving millions of dollars?
2.22.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Effective Output Control
1. Output control measures must be reliable, fair, and accurate.
2. Employees and managers must believe that they can produce the desired results.
3. The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance.
2.22.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Normative Control
Created by: careful selection of employees observing experienced employees & listening to stories about the company
2.32.3
NormativeControl
NormativeControl
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Concertive Control
Autonomous work groups operate without managers group members control processes, output,
and behaviors
2.42.4
ConcertiveControl
ConcertiveControl
Regulation of workers’ behavior anddecisions through work group values and beliefs
Regulation of workers’ behavior anddecisions through work group values and beliefs
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Self-Control
Also known as self-management Employees control their own behavior Employees make decisions within
well-established boundaries Managers teach others the skills they need
to maximize work effectiveness Employees set goals and monitor their own
progress
2.52.5
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
What to Control?
CustomerDefections
CustomerDefections QualityQuality Waste and
Pollution
Waste andPollution
BalancedScorecard
BalancedScorecard
Budgets,Cash Flow,
EVA
Budgets,Cash Flow,
EVA
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Balanced Scorecard
CustomerPerspective
CustomerPerspective
InternalPerspective
InternalPerspective
Innovation and LearningPerspective
Innovation and LearningPerspective
FinancialPerspective
FinancialPerspective
3.13.1
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Advantages of the Balanced Scorecard
1. Forces managers to set goals and measureperformance in each of the four areas
2. Minimizes the chances of suboptimization performance improves in one area, but at
the expense of others
3.13.1
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Balanced Scorecard:Southwest Airlines
3.13.1
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Financial Perspective
Cash flow analysis
Cash flow analysis
Predicts how changes in a business will affect its ability to take in more cash than it pays out
Predicts how changes in a business will affect its ability to take in more cash than it pays out
Balance sheetsBalance sheets Provide a snapshot of a company’sfinancial position at a particular time
Provide a snapshot of a company’sfinancial position at a particular time
Income statements
Income statements
Show what has happened to an organization’s income, expenses, and net profit over a period of time
Show what has happened to an organization’s income, expenses, and net profit over a period of time
Financialratios
Financialratios
Used to track liquidity, efficiency, and profitability over time comparedto other businesses in its industry
Used to track liquidity, efficiency, and profitability over time comparedto other businesses in its industry
3.23.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Basic Accounting Tools
1. Forecast sales
2. Project changes in anticipated cash flows
3. Project anticipated cash outflows
4. Project net cash flows by combining anticipated cash inflows and outflows
Adapted from Exhibit 16.5
3.23.2
Steps for a Basic Cash Flow AnalysisSteps for a Basic Cash Flow Analysis
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Basic Accounting Tools
1. Assets• Current assets• Fixed assets
2. Liabilities• Current liabilities• Long-term liabilities
3. Owner’s equity• Stock• Additional paid in capital• Retained earnings3.23.2
Parts of a Basic Balance SheetParts of a Basic Balance Sheet
Adapted from Exhibit 16.5
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Basic Accounting Tools
SALES REVENUE- sales returns and allowances+ other income= NET REVENUE- cost of goods sold= GROSS PROFIT- total operating expenses= INCOME FROM OPERATIONS- interest expense= PRETAX INCOME- income tax= NET INCOME3.23.2
Basic Income StatementBasic Income Statement
Adapted from Exhibit 16.5
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Financial Ratios
LIQUIDITY RATIOS
Current Ratio
Quick (Acid Test) Ratio
LIQUIDITY RATIOS
Current Ratio
Quick (Acid Test) Ratio
LEVERAGE RATIOS
Debt to Equity
Debt Coverage
LEVERAGE RATIOS
Debt to Equity
Debt Coverage
EFFICIENCY RATIOS
Inventory Turnover
Average CollectionsPeriod
EFFICIENCY RATIOS
Inventory Turnover
Average CollectionsPeriod
PROFITABILITY RATIOS
Gross Profit Margin
Return on Equity
PROFITABILITY RATIOS
Gross Profit Margin
Return on Equity
Adapted from Exhibit 16.6
3.23.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Common Kinds of Budgets
CashBudgets
CashBudgets
Used to forecast the cash a company will have for expenses
Used to forecast the cash a company will have for expenses
ExpenseBudgets
ExpenseBudgets
Used to determine spending onsupplies, projects, or activities
Used to determine spending onsupplies, projects, or activities
ProfitBudgets
ProfitBudgets
Used by profit centers, which have“profit and loss” responsibility
Used by profit centers, which have“profit and loss” responsibility
RevenueBudgets
RevenueBudgets
Used to project or forecastfuture sales
Used to project or forecastfuture sales
Variable BudgetsVariable Budgets Used to project costs acrossvarying levels of sales/revenues
Used to project costs acrossvarying levels of sales/revenues
Capital ExpenditureBudgets
Capital ExpenditureBudgets
Used to forecast large, long-lasting investments
Used to forecast large, long-lasting investments
3.23.2Adapted from Exhibit 16.7
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Economic Value Added (EVA)
Economic ValueAdded
Economic ValueAdded
The amount by which company profits exceed the cost of capital in a given year
The amount by which company profits exceed the cost of capital in a given year
Common Costs of CapitalCommon Costs of Capital
Long-term bank loans Interest paid to bondholders Dividends and growth in stock value that accrue to
shareholders
Long-term bank loans Interest paid to bondholders Dividends and growth in stock value that accrue to
shareholders
3.23.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Economic Value Added (EVA)
1. Calculate net operating profit after tax
1. Calculate net operating profit after tax
2. Identify how much capitalthe company has invested
2. Identify how much capitalthe company has invested
3. Determine the cost paidfor capital
3. Determine the cost paidfor capital
4. Multiply capital used (step 2)times cost of capital (step 3)
4. Multiply capital used (step 2)times cost of capital (step 3)
5. Subtract total dollar cost of capital from net profit after taxes
5. Subtract total dollar cost of capital from net profit after taxes
$3,500,000$3,500,000
$16,800,000$16,800,000
10%10%
(10% x $16,800,000) = $1,680,000
(10% x $16,800,000) = $1,680,000
$3,500,000 net profit-$1,680,000 cost of capital$1,820,000 EVA
$3,500,000 net profit-$1,680,000 cost of capital$1,820,000 EVA
Adapted from Exhibit16.8
3.23.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Why Is EVA Important?
Shows whether a business, division, department, profit center, or product is paying for itself
Makes managers at all levels pay closer attention to their segment of the business
Encourages managers
and workers to be
creative in looking for
ways to improve
EVA performance
3.23.2
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Customer PerspectiveControlling Customer Defections
Monitoring customer defections:
identify which customers are leaving the company
measuring the rate at which they are leaving
Obtaining a new customer costs five times as much as keeping a current one
Customers who have left are likely to tell you what you are doing wrong
Understanding why a customer leaves can help fix problems and make changes
3.33.3
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Internal PerspectiveControlling Quality
ExcellenceExcellence
ValueValue
Conformance to ExpectationsConformance to Expectations
3.43.4
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
The Internal PerspectiveControlling Quality
3.43.4
Exhibit 16.12
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Controlling Waste and Pollution
Good housekeepingGood housekeeping
Material/product substitutionMaterial/product substitution
Process modificationProcess modification
3.53.5
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Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Adapted from Exhibit 16.13
Waste Disposal
Waste Treatment
Recycle & Reuse
Waste Prevention & Reduction
3.53.5
Controlling Waste and Pollution
Recommended