Chapter 10

Copyright © 2005 by South-Western, a division of Thomson LearningAll rights reserved

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Chapter 10

Controlling inOrganizations


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Learning Objectives

• Explain the foundations of control.• Identify the six phases of the corrective control

model.• Describe the primary methods of

organizational control.• Explain several key corporate governance

issues and control mechanisms.


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Foundations of Control

• Control involves the processes for ensuring that behaviors and performance conform to an organization’s standards, including rules, procedures, and goals.

• Preventive controls are mechanisms intended to reduce errors and thereby minimize the need for corrective action.

• Corrective controls are mechanisms intended to reduce or eliminate unwanted behaviors or results and thereby achieve conformity with the organization’s regulations and standards.


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Examples of Different Sources and Types of Control (adapted from Table 10.1)

Types of ControlSource of control Preventive Corrective

Stakeholders Maintaining quotas for hiring Changing recruitment policies

personnel in protected class to attract qualified personnel

Organization Using budgets to guide Disciplining an employee for

expenditures violating a “No Smoking” safety regulation

in a hazardous area

Group Advising a new employee about Harassing and socially the group’s norm in relation to isolating

a worker who doesn’t expected level of output conform to group norms

Individual Deciding to skip lunch in order Revising a report you have to complete a project on time written because you are

dissatisfied with it


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Linkage to Strategic Goals

• Controls should be linked to the strategic goals of the organization.

• A good organizational control will be:– Objective– Complete– Timely– Acceptable


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Cost-Benefit Model of Organizational Control(adapted from Figure 10.1)


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Corrective Control Model(adapted from Figure 10.2)

1. Define the System

5. MakeComparisons

If okaycontinue

2. Identify KeyCharacteristics

3. Set Standards

4. CollectInformation

If deviations6. DiagnoseAnd Correct

Problems


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Primary Organizational Control Methods(adapted from Figure 10.3)

MechanisticAnd Organic

Control

OrganizationalControl

MarketControl

Financial andAccounting

Controls

Automation-Based

Control


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Mechanistic and Organic Control Methods (adapted from Table 10.2)

Mechanistic Control Methods

Use of detailed rules and procedures whenever possible

Top-down authority, with emphasis on positional power

Activity-based job descriptions that prescribe day-to-day behaviors

Emphasis on extrinsic rewards (wages, pensions, status symbols)

Distrust of teams, based on an assumption that team goals conflict with organizational goals

Organic Methods

Use of detailed rules and procedures only when necessary

Flexible authority, with emphasis on expert power and networks of influence

Results-based job descriptions that emphasize goals to be achieved

Emphasis on both extrinsic and intrinsic rewards (meaningful work)

Use of team, based on an assumption that team goals and norms assist in achieving organizational goals


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Market Control

• Market control involves the collection of data related to sales, prices, costs, and profits for guiding decisions and evaluating results.– Marketing control requires that:

• the costs of the resources used in producing outputs be measured monetarily,

• the value of the goods and services produced be defined clearly and priced monetarily, and

• the prices of the goods and services produced be set competitively– Two control mechanisms that meet these requirements are:

• Profit-Sharing Plans• Customer Monitoring


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Financial and Accounting Controls

• Financial control includes the mechanisms for preventing or correcting the misallocation of resources.

• Comparative financial analysis is the evaluation of a firm’s financial condition for two or more time periods.


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Activity-Based Costing Model(adapted from Figure 10.4)

Resources

GoodsAnd Services

ActivityCost Assignment

ResourceCost Assignment

ActivitiesInputInformation

PerformanceEvaluation

Cost View

ProcessView


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Automation-Based Control

• Automation involves the use of self-regulating devices and processes that operate independently of people.

• Machine control utilizes self-regulating instruments or devices to prevent and correct deviations from preset standards.


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Corporate Governance

• A corporation is a government-approved form of organization that allows different parties to contribute capital, expertise, and labor for the benefit of all of them.

• Corporate governance is the pattern of relations and controls between the stockholders, the board of directors, and the top management of a company.


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Corporate Governance (cont.)

• External control mechanisms– Sarbanes-Oxley Act

Criminal Accountability Whistleblower Protection

• Internal control mechanisms– Board of Directors

Independent Self-Assessment Executive Compensation Evaluation of CEO Resource Allocation Fiduciary Responsibility and Control

Documents

Chapter 10