chapter 9Control Systems

McGraw-Hill/IrwinPrinciples of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Learning Objectives

1. Discuss the attributes of a typical organizational control system.

2. Describe the different kinds of controls that are used in organizations.

3. Explain how different controls should be matched to the strategy and structure of an organization.

4. Outline the features of the balance score card approach to control metrics, and explain why it is useful.

5. Discuss informal or backchannel control methods.

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Control System

• Control: The process through which managers regulate the activities of individuals and units.

• Standard: A performance requirement that the organization is meant to attain on an ongoing basis.

• Subgoal: An objective that, if achieved, helps an organization attain or exceed its major goals.

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A typical Control System

Establish goalsand standards

Takecorrective action

Measureperformance

Providereinforcement

Variance betweenperformance and

goals and standards

Compareperformance againstgoals and standards

Performance meetsor exceeds

goals and standards

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Disaster Plans

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Effective No Plan

Plan

Source: USA Today Snap Shots

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Establishing Goals and Standards

• Most organizations operate with a hierarchy of goals.

• In the case of a business enterprise, the major goals at the top of the hierarchy are normally expressed in terms of profitability and profit growth.

• These goals are normally translated into subgoals that can be applied to individuals or units within an organization.

• As with major goals, subgoals should be precise and measurable, address important issues, be challenging but realistic, and specify a time period.

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Big Hairy Goal

• Most individuals probably have a lot of goals, but do they have a Big Hairy goal?

• A big hairy goal (BHG) is a goal that is so far from where you are in your career now that you will have to push yourself incredibly hard to achieve it.

• In the book, The Courage to Succeed: Success Secrets of an Unlikely Three-Time Olympian, Ruben Gonzalez explains how he applied his managerial perseverance to sports when he decided to compete in the Olympics.

• Perseverance example: During his career selling copiers, he personally cold called every office on every floor of every building in downtown Houston—twice in order to achieve his goals.

Source: Business Week Online, October 6, 2006

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Achieving Your Own BHG

1. Ask yourself honestly: Is this a wish, a dream, or a BHG?

2. Tell yourself that quitting is not an option.

3. Hang in there and keep fighting.

4. Surround yourself with successful people.

5. Gonzalez says the path to reaching your BHG boils down to this: First, you dream it. Then you struggle. Finally, you emerge victorious.

6. Stay focused.

Source: Business Week Online, October 6, 2006

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Measuring Performance

• Once goals, subgoals, and standards have been established, performance must be measured against the criteria specified.

• This is not as easy as it sounds. Information systems have to be put in place to collect the required data; and the data must be compiled into usable form and transmitted to the appropriate people in the organization.

• Reports summarizing actual performance might be tabulated daily, weekly, monthly, quarterly, or annually.

• With the massive advances in computing power that have occurred over the last three decades, managers have seemingly infinite quantitative information at their disposal.

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Comparing Performance Against Goals and Standards

• The next step in the control process is to compare actual performance against goals and standards.

• If performance is in line with goals or standards, that is good. However, managers need to make sure the reported performance is being achieved in a manner consistent with the values of the organization.

• If reported performance falls short of goals and standards, managers need to find the reasons for the variance.

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Taking Corrective Action

• Variance from goals and standards require that managers take corrective action.

• When actual performance easily exceeds a goal, corrective action might be increasing the goal.

• When actual performance falls short of a goal, depending on what further investigation reveals, managers might change strategy, operations, or personnel.

• Radical change is not always the appropriate response when an organization fails to reach a major goal.

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Providing Reinforcement

• If the goals and standards are met or exceeded, managers need to provide timely positive reinforcement to those responsible.

• Positive reinforcement could include the following: congratulations for a job well done, awards, pay increases, bonuses or enhanced career prospects.

• Providing positive reinforcement is just as important an aspect of a control system as taking corrective action.

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Methods of Control

• Personal controls

• Bureaucratic controls

• Output controls

• Cultural controls

• Control through incentives

• Market controls

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Personal Control

• Personal control: Making sure through personal inspection and direct supervision that individuals and units behave in a way that is consistent with the goals of an organization.

• Personal control can be very subjective, with the manager assessing how well subordinates are performing by observing and interpreting their behavior.

• Personal control has serious limitations. For example, excess supervision can be demotivating. Employees may resent being closely supervised and perform better with a greater degree of freedom.

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Bureaucratic Controls

• Bureaucratic controls: Control through a formal system of written rules and procedures.

• The great German sociologist Max Weber was the first to describe the nature of bureaucratic controls.

• Bureaucratic controls rely on prescribing what individuals or units can and cannot do—this is, on establishing bureaucratic standards.

• Almost all large organizations use some bureaucratic controls.

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Question

The great German sociologist Max Weber was the first to describe the nature of ______ controls.

a. cultural

b. personal

c. bureaucratic

d. output

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Output Controls

• Output controls: Setting goals for units or individuals to achieve and monitoring performance against those goals.

• Output controls can be used when managers can identify tasks that are complete in themselves in the sense of having a measurable output or criterion of overall achievement that is visible.

• The great virtue of output controls is that they facilitate decentralization and give individual managers within unit much greater autonomy than either personal controls or bureaucratic controls

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Cultural Controls

• Cultural control: Regulating behavior by socializing employees so that they internalize the values and assumptions of an organization and act in a manner that is consistent with them.

• Self-control: Occurs when employees regulate their own behavior so that it is congruent with organizational goals.

• Although cultural control can mitigate the need for other controls, thereby reducing monitoring costs, it is not universally beneficial.

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Control Through Incentives

• Incentives: Devices used to encourage and reward appropriate employee behavior.

• Many employees receive incentives in the form of annual bonus pay.

• The idea is that giving employees incentives to work productively cuts the need for other control mechanisms.

• Control through incentives is designed to facilitate self-control—employees regulate their own behavior in a manner consistent with organizational goals to maximize their chance of earning incentive-based pay.

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More Money?

Source: USA Today Snap Shots

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More Money BetterHealthcare

BetterRetirement

Work/FamilyBalance

Want

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Control Through Incentives

• When incentives are tied to team performance they have the added benefit of encouraging cooperation between team members and fostering a degree of peer control.

• Peer control: Occurs when employees pressure others within their team or work group to perform up to or in excess of the expectations of the organization.

• In sum, incentives can reinforce output controls, induce employees to practice self-control, increase peer control, and lower the need for other control mechanisms.

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Market Controls

• Market controls: Regulating the behavior of individuals and units within an enterprise by setting up an internal market for some valuable resource such as capital.

• Market controls are usually found within diversified enterprises organized into product divisions, where the head office might act as an internal investment bank, allocating capital funds between the competing claims of different product divisions based on an assessment of their likely future performance.

• The main problem with market controls is that fostering internal competition between divisions for capital and the right to develop new products can make it difficult to establish cooperation between divisions for mutual gain.

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Question

If an organization wants to be effective, it must employ personal controls only. Do you agree? Explain.

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Matching Controls to Strategy and Structure

• Functional structure with low integration• Functional structure with high integration

• Controls in diversified firms:

• Controls in the diversified firm with low integration• Controls in the diversified firm with high integration

• Controls in the single business:

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Choosing Control Metrics: The Balanced Scorecard

• The Balanced scorecard: A control approach that suggest managers use several different financial and operational metrics to track performance and control an organization.

• In addition to traditional financial measures, which is referred to as the financial perspective, managers should use the following metrics related to:

- How customers see the organization (the customer perspective) - What the organization must excel at (the operational perspective)- The ability of the organization to learn and improve its offerings and

processes over time (the innovation perspective)

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Backchannel Control Methods

• Backchannel: An informal channel through which managers can collect important information.

• Managers often buy products from their own organization, interacting with it as customers, to see how well it is treating this crucial constituency.

• Some senior managers work alongside lower-level employees—partly to build a network of contacts and partly to understand how the organization is performing at that level.