Chapter Fourteen

Managerial Control

© 2013 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.

 This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

14-3

Managerial Control

Control Any process that directs the activities of

individuals toward the achievement of organizational goals

The Siamese twins of management• Planning• Control

14-4

Signs that a Company Lacks Controls

14-5

Broad Categories of Control

Bureaucratic control The use of rules, regulations, and authority to

guide performance

Market control Control based on the use of pricing mechanisms

and economic information to regulate activities within organizations

14-6

Broad Categories of Control

Clan control Control based on the

norms, values, shared goals, and trust among group members.

14-7

The Control Process

Figure 14.1

14-8

Control Systems have Four Steps

1. Setting performance standards.2. Measuring performance.3. Comparing performance against the

standards and determining deviations.4. Taking action to correct problems and

reinforce successes.

14-9

Step1-Setting Performance Standards

Standard Expected performance for a given goal: a target that

establishes a desired performance level, motivates performance, and serves as a benchmark against which actual performance is assessed.

Performance standards can be set with respect to:• quantity• quality• time used• Cost

Ex. Pizza delivery time-40 minutes, 95% customer satisfaction, increasing sales by

5%, decreasing accidents by 10%, decreasing employee absences by 30%, increasing productivity by 5%, increasing quality to 98%, etc.

14-10

10

Setting Standards

1. A good standard must enable goal achievement.

2. Companies determine standards by listening to customers or observing competitors.

3. Standards can be determined by benchmarking other companies. Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies’ performance

standards.

14-11

Step2-Measuring Performance

14-12

Step3-Comparing Performance with the Standard

Principle of exception A managerial principle stating that control is

enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard.

Step4-Corrective Action

• Identify performance deviations

• Analyze those deviations

• Develop and implement programs to correct them

13

ControlControlProcessProcessControlControlProcessProcess

CorrectCorrect

IdentifyIdentify

Analyze

Analyze

14-14

Dynamic, Cybernetic Process

14

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

1.41.4

14-15

15

Three Basic Control Methods

FeedbackControl

FeedbackControl

ConcurrentControl

ConcurrentControl

FeedforwardControl

FeedforwardControl1.51.5

the control process used before operations begin, including policies, procedures, and rules designed to ensure that planned activities are carried out properly

is the control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed.

control that focuses on the use of information about previous results to correct deviations from the acceptable standard.

14-16

Control Isn’t Always Worthwhile or Possible

Control is achieved when behavior and work procedures conform to standards and goals are accomplished.

• Control loss occurs when behavior and work procedures do not conform to standards.

Implementing controls isn’t always worthwhile or possible because: Regulation costs

• Whether the costs and both intended and unintended consequences of control exceed its benefits.

Cybernetic feasibility• The extent to which it is possible to implement each step

in the control process. If one or more steps cannot be implemented, then maintaining effective control may be difficult or impossible. 16

14-17

The Role of Six Sigma

At a six-sigma level, a process is producing fewer than 3.4 defects per million, which means it is operating at a 99.99966 percent level of accuracy

Six Sigma companies have not only close to zero product or service defects but also substantially lower production costs and cycle times and much higher levels of customer satisfaction

14-18

Management Audits ControlVarious Systems

Management audit An evaluation of the

effectiveness and efficiency of various systems within an organization

14-19

Management Audits ControlVarious Systems

External audit An evaluation

conducted by one organization, such as a CPA firm, on another.

Internal audit A periodic

assessment of a company’s own planning, organizing, leading, and controlling processes.

14-20

External Audit

1. Investigates other organizations for possible merger or acquisition

2. Determines the soundness of a company that will be used as a major supplier

3. Discovers the strengths and weaknesses of a competitor to maintain or better exploit the competitive advantage of the investigating organization

14-21

Internal Audit

1. Assesses what the company has done for itself

2. What it has done for its customers or other recipients of its goods or services.

14-22

Budgetary Controls

Budgeting The process of investigating what is being done

and comparing the results with the corresponding budget data to verify accomplishments or remedy differences

also called budgetary controlling.

14-23

Budgetary Controls

Fundamental budgetary considerations proceed through three stages: Establishing expectancies starts with the broad

plan for the company and the estimate of sales, and it ends with budget approval and publications.

Budgetary operations stage deals with finding out what is being accomplished and comparing the results with expectancies.

The last stage involves taking corrective action when necessary.

14-23

14-24

A Sales-Expense Budget

Exhibit 14.3

14-25

Types of Budgets

14-26

Types of Budgets

Sales budget usually prepared by month, sales area, and product.

Production budget is expressed in physical units.Cost budget is used for areas of the organization

that incur expenses, but bring in no revenue, such as accounting, HR, Legal, etc.

Cash budget is prepared after all other budget estimates are completed.

Capital budget is used for the cost of fixed assets such as plant and equipment.

Master budget includes all major activities of the business.

14-26

14-27

Checking the Checkers

Accounting audits Procedures used to

verify accounting reports and statements.

Performed by outside CPA firm.

14-28

Activity-Based Costing

Activity-based costing (ABC) A method of cost accounting designed to identify

streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities

14-29

How Dana Discovers WhatIts True Costs Are

Exhibit 14.5

14-30

Balance Sheet

Balance sheet A report that shows the financial picture of a

company at a given time and itemizes assets, liabilities, and stockholders’ equity.

14-31

Balance Sheet

Assets The values of the

various items the corporation owns.

Liabilities The amounts a

corporation owes to various creditors

Stockholders’ equity The amount accruing

to the corporation’s owners.

Assets = Liabilities + Stockholders’ equity

14-32

Profit and Loss Statement

Profit and loss statement An itemized financial

statement of the income and expenses of a company’s operations

Exhibit 14.7

14-33

Financial Ratios

Current ratio A liquidity ratio that indicates the extent to which

short term assets can decline and still be adequate to pay short-term liabilities

14-34

Financial Ratios

Debt-equity ratio A leverage ratio that indicates the company’s

ability to meet its long-term financial obligations

Return on investment (ROI) A ratio of profit to capital used, or a rate of return

from capital

14-35

Using Financial Ratios

Management myopia Focusing on short-

term earnings and profits at the expense of longer-term strategic obligations.

14-36

Bureaucratic Control has a Downside

Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of trouble by following the rules. a. Tactical behavior – the most common type of tactical

behavior is to manipulate information or report false performance data.

Resistance occurs for several reasons: a. Comprehensive control systems increase the accuracy

of performance data and make employees more accountable for their actions.

b. Control systems can change expertise and power structures.

c. Control systems can change the social structure of the organization.

14-36

14-38

More Effective Control Systems

The systems are based on valid performance standards.

They communicate adequate information to employees.

They are acceptable to employees.They use multiple approaches.They recognize the relationship between

empowerment and control.

14-39

Balanced Scorecard

Balanced scorecard Control system combining four sets of

performance measures: financial, customer, business process, and learning and growth

40

The Balanced Scorecard

CustomerPerspective

How do customers see us?

CustomerPerspective

How do customers see us?

InternalPerspective

At what must we excel?

InternalPerspective

At what must we excel?

Innovation and LearningPerspective

Can we continue to createvalue?

Innovation and LearningPerspective

Can we continue to createvalue?

FinancialPerspective

How do we look toshareholders?

FinancialPerspective

How do we look toshareholders?

Encourages managers to look at four different perspectives on company performance.

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

41

14-42

The Balanced Scorecard:Southwest Airlines

42

14-43

Market Control

Market control involves the use of economic forces and the pricing mechanisms that accompany them to regulate performance.

Market controls let supply and demand determine prices and profits

Market controls at the corporate level are used to regulate independent business units.

Market controls at the business unit level regulate exchanges among departments and functions.

Market controls at the individual level provide a natural incentive for employees to enhance their skills and offer them to potential firms.

14-43

14-44

Examples of Market Control

Exhibit 14.9

14-45

Clan Control

Clan control - creating relationships built on mutual respect and encouraging the employee to take responsibility for his or her actions

Clan control relies on empowerment and culture 1.Bureaucratic controls don’t work well today

because:• a. Employees’ jobs have changed – nature of work is

evolving.• b. The nature of management has changed.• c. The employment relationship has changed.

14-45

14-46

Clan Control

Managers must empower employees by: a. putting control where the operation is b. using ‘real time’ rather than after-the-fact

controls c. rebuilding the assumptions underlying

management control to build on trust rather than distrust

d. moving to control based on peer norms e. rebuilding the incentive systems to reinforce

responsiveness and teamwork 14-46

14-47

Management Control in anEmpowered Setting

Put control where the operation is.Use real-time rather than after-the-fact controls.Rebuild the assumptions underlying

management control to build on trust rather than distrust.

Move to control based on peer norms.Rebuild the incentive systems to reinforce

responsiveness and teamwork.

14-48

http://bevideos.mhhe.com/business/video_library/0077424611/swf/Clip_06.html

14-48

14-49

Video: Manufacturing

Can America thrive without manufacturing jobs?

What should be combined with labor costs? Why?