Chapter 11 Organizational Control

Monitoring the efficiency and effectiveness of activities necessary for achieving org. goals. Anticipating future events –Responding to opportunities & threats Evaluating strategy & structure Keeping employees motivated

Control Systems Formal feedback systems that provide information about org. performance Effective control system: –Provides an accurate picture of org. performance –Provides info. in a timely manner –Is flexible enough to allow managers to respond to unexpected events Revolutionized by IT

Three Types of Control

Feedforward Control Input stage Anticipate problems before they occur Examples: –Monitor changes in trends –Coordinate with suppliers

Concurrent Control Immediate feedback about how efficiently inputs are being turned into outputs Allows for problems to be corrected as they arise Total Quality Management

Feedback Control Provides information regarding customer’s reactions Example: –Number of customer returns –Number of complaints

The Control Process Step 1: Establish Performance Standards –Thousands to choose from –Must be consistent with company strategy –Overemphasis on any one can have negative consequences

The Control Process Step 2: Measure Actual Performance –Measure outputs of behaviors Easier to measure More objective –Measure behaviors themselves Routine are easy to measure Non-routine are hard to measure

The Control Process Step 3: Compare actual performance against standards. Three possibilities –Higher –Lower –Same as performance standard

The Control Process Step 4: Evaluate and take corrective action If performance was unacceptable: –Changes in the way resources are used are needed Technology, training, structure, motivation, etc.

Three Control Systems

Financial Measures of Performance Profit Ratios – How efficiently resources are used to generate profits Return on Investment –Net Income Before Taxes / Total Assets Gross Profit Margin –(Sales – COGS) / Sales

Liquidity Ratios – How easily short term obligations can be met. Current Ratio –Current assets / current liabilities Quick Ratio –(Current assets – inventory) / current liabilities Financial Measures of Performance

Leverage Ratios – how much debt vs. equity was used to buy org. resources Debt-to-Assets Ratio –Debt / Assets Times-covered Ratio –EBIT / Interest Expenses Financial Measures of Performance

Asset Activity Ratios – How efficiently are org. resources being used Inventory Turnover –COGS / Inventory Days Sales Outstanding –Accounts Receivable / Average Daily Sales Financial Measures of Performance

Organizational Goals Too low –Not motivating Too High –Discouraging…not motivating Stretch Goals –Appropriately Challenging

Operating Budgets Plan for how managers intend to used org. resources in order to create org. performance Resources are divided up and allocated down the hierarchy Managers are evaluated by their ability to meet budget –Revenue, cost control, profitability

Problems with Output Control Tendency to focus on short-term High standards might promote unethical behavior

Behavior Control Direct Supervision Management by Objectives (MBO) Bureaucratic Control

Direct Supervision Managers actively monitor subordinates –Teach appropriate behaviors –Intervene when corrective action is needed –Can be effective Problems with Direct Supervision –Expensive –Can decrease motivation –Not feasible/appropriate in all circumstances

Management by Objectives Control system based on subordinate’s ability to meet goals & performance objectives –Specific goals are set at each level of the firm. –Goal setting is participatory –Periodic reviews of subordinates’ progress toward goals are held –pay raises and promotions are tied to goal attainment

Bureaucratic Control Control by a system of rules & SOPs. –Tells workers what to do (standardized actions) so outcomes are predictable. –There is still a need for output control to correct mistakes. –Best used for routine problems in stable environments.

Problems with Bureaucratic Control Easy to have too many rules –Too much “red tape” People will blindly follow rules –Too standardized –No ability to learn –No ability to innovate

Organizational Culture A shared set of values, beliefs, & assumptions Employees internalize organizational values –Creates an internalized control system –Eliminates the need for externally imposed controls Works in situations where behavior & output control don’t Can be created to focus on long-term performance

Organizational Change Fundamental tension between 2 control forces: –To standardize & make performance predictable –To be responsive to changes / flexible Because environments are dynamic, –The highest performing companies are those that are able to constantly change Four step process

Assessing the Need for Change Recognizing that there is a problem –Scanning external environment & internal controls systems Identifying its source –Organizational Diagnosis

Deciding on the Change to Make What is the ideal future state –Strategy, structure, technology, etc. Identify sources of resistance to change –Fear of ambiguity –Fear that they will not be successful after change –Can be overcome through participation & adequate information

Implementing the Change Top-Down –Top managers decide & tell people what to do –Quick Bottom-Up –Group / Participatory process –More gradual –Better chance for buy-in

Evaluating Change Use output controls & behavior controls Benchmarking