Copyright ©2015 Pearson Education, Inc. 14 Chapter Foundations of Control Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Learning Outcomes Explain the nature and importance of control. Describe the three steps in the control process. Discuss the types of controls organizations and managers use. Discuss contemporary issues in control. After studying this chapter, you will be able to: Explain the nature and importance of control. Describe the three steps in the control process. Discuss the types of controls organizations and managers use. Discuss contemporary issues in control. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. 14.1 Explain the nature and importance of control. Copyright ©2015 Pearson Education, Inc.

The Communication Process Control is the management function that involves monitoring activities to ensure that they’re being accomplished as planned and correcting any significant deviations. Managers know that their business units are performing properly only after they’ve evaluated which activities have been accomplished and how the actual performance compares with the desired standard. An effective control system ensures that the ways in which activities are completed attains the organization’s goals. The effectiveness of a control system is determined by how well it facilitates goal achievement. The more a control system helps managers achieve their organization’s goals, the better it is. John Jamason, media and public information manager, talks to employees working in the new social media monitoring room at the Palm Beach County Emergency Operations Center. Social media such as Facebook and Twitter will help the center track and monitor information during storm emergencies to get help to people in need. Copyright ©2015 Pearson Education, Inc.

The Importance of Control Control is important because it’s the only way that managers know whether organizational goals are being met and, if they are not being met, the reasons why. The value of the control function can be seen in three specific areas: planning, empowering employees, and protecting the workplace. As the final step in the management process, controlling provides a critical link to planning, as we see here in Exhibit 14-1. If managers didn’t control, they’d have no way of knowing whether their goals and plans were being achieved and what future actions to take. The second reason controlling is important is because it can empower employees. Many managers are reluctant to empower their employees because they fear that something will go wrong and they will be held accountable. However, an effective control system provides information and feedback on employee performance and minimizes the chance of problems. The final reason that managers control is to protect the organization and its assets. Organizations face threats from natural disasters, financial pressures and scandals, workplace violence, supply chain disruptions, security breaches, and even possible terrorist attacks. Comprehensive controls and backup plans help minimize such work disruptions. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. 14.2 Describe the three steps in the control process. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. The Control Process The control process has three steps: measuring actual performance, comparing actual performance against a standard, and taking managerial action to correct deviations or to address inadequate standards. Here in Exhibit 14-2 we see how the control process works. Note that the control process assumes that performance standards already exist; these standards are the specific goals created during the planning process. Copyright ©2015 Pearson Education, Inc.

Measuring Performance Sources of information: Personal observation Statistical reports Oral reports Written reports To determine actual performance a manager must get performance records, so the first step in control is measuring. Four sources of information that are frequently used to measure actual performance are personal observation, statistical reports, oral reports, and written reports. While each of these sources has particular strengths and weaknesses, using a combination of them increases both the number of input sources and the probability of receiving reliable information. Personal observation provides firsthand, intimate knowledge of unfiltered, actual activity. It permits intensive coverage because minor and major performance activities can be observed, and allows the manager to read between the lines. Management by walking around (MBWA) describes when a manager is out in the work area and interacting directly with employees, exchanging information about what’s going on. It’s an opportunity to pick up factual omissions and observe body language. Personal observation, however, is subject to the viewer’s perceptual biases, is a time-consuming effort, may be obtrusive, and may trigger concern in some employees. Widespread computer use has led managers to rely increasingly on statistical reports for measuring actual performance. Statistical reports are not limited to computer outputs. They can include graphs, bar charts, and numerical displays that managers can use for assessing performance. However, statistical reports often focus on only a few key areas and may often ignore important subjective factors. Information can also be acquired through oral reports, which can be gleaned through conferences, meetings, one-to-one conversations, or telephone calls. Although the information is filtered, it is fast, allows for feedback, and permits expression, tone of voice, and words themselves to convey meaning. It can also be recorded. Actual performance may also be measured by written reports, which require more preparation time and formality than other measurements of performance. This often makes them more comprehensive and concise that oral reports. Copyright ©2015 Pearson Education, Inc.

Criteria for Measurement What managers measure is probably more important to the control process than how they measure. Selecting the right criteria to measure is critical for evaluating performance, but what we measure also influences the areas of work on which people in the organization will focus their efforts. Some control criteria are applicable to any management situation. Because all managers direct the activities of others, criteria such as employee satisfaction or turnover and absenteeism rates can be measured. Keeping costs within budget is also a fairly common control measure. However, any comprehensive control system needs to recognize the diversity of activities among managers. For example, a production manager in a paper tablet manufacturing plant might use measures of the quantity of tablets produced per day, tablets produced per labor hour, scrap tablet rate, or percentage of rejects returned by customers. In contrast, marketing managers use measures such as percent of market held, number of customer visits per salesperson, or number of customer impressions per advertising medium. While some activities are more difficult than others to measure in quantifiable terms, most activities can be broken down into objective segments that can be measured. Ultimately, the manager determines what value a person, department, or unit contributes to the organization and then converts that contribution into standards. When a performance indicator cannot be stated in quantifiable terms, managers should use subjective measures, while recognizing the limitations of the data. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Range of Variation Next comes the step in which we compare the actual performance to the standard. Although some variation in performance can be expected in all activities, it’s critical to determine an acceptable range of variation, as seen here in Exhibit 14-3. Any deviations outside this range require attention. Copyright ©2015 Pearson Education, Inc.

Comparing Performance to Goals Let’s work through an example. Chris Tanner is a sales manager for Green Earth Gardening Supply, a distributor of specialty plants and seeds in the Pacific Northwest. Chris prepares a report during the first week of each month that describes sales for the previous month, classified by product line. Exhibit 14-4 displays both the sales goals (the standard) and actual sales figures for the month of June. After looking at the numbers, should Chris be concerned? Sales were a bit higher than originally targeted, but does that mean there were no significant deviations? That depends on what Chris thinks is significant; that is, what is outside the acceptable range of variation. Look at the figures in the exhibit again. Even though overall performance was quite favorable, some product lines need closer scrutiny. If sales of heirloom seeds, flowering bulbs, and annual flowers continue to be over what was expected, Chris might need to order more product to meet customer demand. Because sales of vegetable plants were 15 percent below goal, Chris may need to run a special on them. As this example shows, both overvariance and undervariance may require managerial attention, which is the third step in the control process. Copyright ©2015 Pearson Education, Inc.

Correcting Performance Immediate corrective action Basic correction action When faced with a decision, managers can choose among three courses of action: do nothing, correct the actual performance, or revise the standards. So how do you correct actual performance? Depending on the problem, a manager can take different corrective actions. For instance, if unsatisfactory work is the reason for performance variations, the manager could correct it with training programs, disciplinary action, changes in compensation practices, and so on. One decision a manager faces is whether to take immediate corrective action, which corrects problems right away to get performance back on track, or to use basic corrective action, which looks at how and why performance deviated before correcting the source of deviation. Effective managers analyze deviations and, if the benefits justify it, take the time to pinpoint and correct the causes of variance. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Revising Standards If performance consistently exceeds the goal, then the goal may need to be raised. If the variance results from an unrealistic standard—one that is set too low or too high—the standard, not the performance, needs corrective action. For example, if performance consistently exceeds the goal, then a manager should look at whether the goal is too easy and needs to be adjusted. However, managers must be cautious about revising a standard downward. It’s natural to blame the goal when an employee or a team falls short, rather than accept that one’s performance was inadequate. If you believe the standard is realistic, fair, and achievable, tell employees that you expect future work to improve and then take the necessary corrective action to help make that happen. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. 14.3 Discuss the types of controls organizations and managers use. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Feedward Control A few important performance indicators that executives in the intensely competitive call-center service industry measure are: cost efficiency, the length of time customers are kept on hold, and customer satisfaction with the service provided. To make good decisions, managers want and need the type of information that will help them control work performance. Management can implement controls before an activity begins (called feedforward control), while the activity is going on (called concurrent control), or after the activity has been completed (called feedback control). You can see this timing illustrated here in Exhibit 14-5. The most desirable type of control—feedforward control—prevents problems because it takes place before the actual activity starts. For instance, when McDonald’s opened its first restaurant in Moscow, it sent company quality control experts to help Russian farmers learn techniques for growing high-quality potatoes because McDonald’s demands consistent product quality no matter the geographical location. Another example of feedforward control is the scheduled preventive maintenance programs on aircraft done by the major airlines. However, feedforward controls require timely and accurate information that isn’t always easy to obtain, so managers frequently end up using the other two types of control. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Concurrent Control Control that takes place while a work activity is in progress. Concurrent control, as its name implies, takes place while a work activity is in progress. For instance, Google’s director of business product management and his team keep a watchful eye on one of its most profitable businesses—online ads. They watch the number of searches and clicks, the rate at which users click on ads, and the revenue this generates. Everything is tracked hour by hour, compared with the data from a week earlier, and charted. If something is not working well, they fine-tune it. Computers and computerized machine controls can be designed to include concurrent controls, such as organizational quality programs that inform workers whether their work output is of sufficient quality to meet standards. The best-known form of concurrent control, however, is direct supervision, and MBWA is a great way for managers to do this. United Airlines uses concurrent control at its Network Operations Center in Chicago that runs 24 hours a day seven days a week. To ensure safe travel for passengers, employees monitor weather patterns, coordinate with air traffic control from across the country, route aircrafts, and communicate directly with flight crews. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Feedback Control Control that takes place after a work activity is done. The most popular type of control relies on feedback. In feedback control, the control takes place after the activity is done. This type of control has two advantages: Feedback gives managers meaningful information on how effective their planning efforts were. Feedback that shows little variance between standard and actual performance indicates that the planning was generally on target. If the deviation is significant, that information can be used to formulate new plans. Feedback enhances motivation because people want to know how well they’re doing. Copyright ©2015 Pearson Education, Inc.

Keeping Track of an Organization’s Finances: Ratio Analysis Some key areas that require control are finances, company information, and organizational performance. A balanced scorecard approach may be used. For a company to earn a profit, managers need financial controls. Traditional financial controls include ratio analysis. Ratios, like those seen in Exhibit 14-6, are calculated using selected information from the organization’s balance sheet and income statement. Copyright ©2015 Pearson Education, Inc.

Keeping Track of an Organization’s Finances: Budget Analysis Budgets are used for both planning and controlling. Budgets analysis is also used. Budgets are used for both planning and controlling. As a planning tool, a budget indicates which work activities are important and which resources, and how much of these resources, should be allocated to those activities. As a controlling tool, budgets provide managers with quantitative standards against which to measure and compare resource consumption. Significant deviations require action, the manager examines what has happened and why, and then takes necessary action. Copyright ©2015 Pearson Education, Inc.

Keeping Track of an Organization's Information Management information system (MIS): A system used to provide management with needed information on a regular basis. To monitor and measure organizational activities, managers need the right information at the right time and in the right amount. To measure actual performance, managers need information about what is happening within their area of responsibility and about the standards against which to compare actual performance. Managers also require analyzed data to determine if deviations are acceptable and to help develop appropriate courses of action. The way managers do this is with a management information system (MIS). It can be manual or computer-based, although most organizational MIS are computer-supported applications. “System” in MIS implies order, arrangement, and purpose. An MIS focuses specifically on providing managers with information (that is, processed and analyzed data) and not merely data (which are raw, unanalyzed facts). Information is an organizational resource that needs controlling. In 2012 there were 47,000 reported security incidents and 621 confirmed data breaches. Information is critically important to everything an organization does, so this information needs to be protected. Managers must have comprehensive and secure controls in place to protect the information they receive. These controls range from data encryption and system firewalls to data backups and other techniques. Information controls should be monitored regularly to ensure that all possible precautions are in place to protect important information. The organization should look for problems in places it might not even have considered, like search engines. Equipment such as laptop computers, tablets, and even RFID (radio-frequency identification) tags are vulnerable to viruses and hacking. Copyright ©2015 Pearson Education, Inc.

Keeping Track of Employee Performance It’s also important to keep track of employee performance. This includes assessing whether employees are doing their jobs as planned and meeting goals that have been set. If not, employee counseling or employee discipline may be needed. Copyright ©2015 Pearson Education, Inc.

Keeping Track with a Balanced Scorecard Approach Financial Customer Internal Processes People/innovation/growth assets The balanced scorecard approach looks at more than the financial perspective by typically looking at four areas that contribute to a company’s performance: financial, customer, internal processes, and people/innovation/growth assets. According to this approach, managers are supposed to develop goals in each of the four areas and then measure whether the goals are being met. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. 14.4 Discuss contemporary issues in control. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Contemporary Issues Cross-cultural differences Workplace concerns The importance of control as a managerial function cannot be overstated. Two control issues that managers face today are cross-cultural differences and workplace concerns. Workplace concerns include technology usage, employee theft, and workplace violence. Copyright ©2015 Pearson Education, Inc.

Copyright ©2015 Pearson Education, Inc. Cultural Differences The differences among organizational control systems in global organizations are found primarily in the measurement and corrective action steps of the control process. In a global corporation, for instance, managers of foreign operations tend not to be closely controlled by the home office, which in turn often relies on extensive, formal reports for control. The global company may also use information technology to control work activities. Organizations in technologically advanced nations use indirect control devices—particularly computer-based reports and analyses—in addition to standardized rules and direct supervision to ensure that activities are going as planned. In less technologically advanced countries, direct supervision and highly centralized decision making are the basic means of control. Managers in foreign countries may have constraints on what corrective action they can take because laws in some countries do not allow managers the option of closing facilities, laying off employees, or bringing in a new management team from outside the country. Another challenge global companies face when collecting data is comparability. For instance, a company’s manufacturing facility in Mexico might produce the same products as a facility in Scotland, but the Mexican facility might be more labor intensive than its counterpart to take advantage of lower labor costs in Mexico. If top-level executives were to control costs by calculating labor costs per unit or output per worker, the figures would not be comparable. Copyright ©2015 Pearson Education, Inc.

Controlling Technology Usage Is my work computer really mine? Do I have a right to privacy at work? Today’s workplaces present considerable control challenges for managers. From monitoring employees’ computer usage at work to protecting the workplace against violence, managers need controls to ensure that work can be done efficiently, effectively, and according to plan. Employers can (and do) read your email, tap your telephone, monitor your work by computer, store and review computer files, monitor you in an employee bathroom or dressing room, and track your whereabouts in a company vehicle. In fact, some 30 percent of companies have fired workers for misusing the Internet and another 28 percent have terminated workers for email misuse. A big reason that managers feel they need to monitor what employees are doing is that employees are hired to work, not to surf the Web, watch online videos, or shop. In fact, a survey of U.S. employers said that 87 percent of employees look at non-work-related websites while at work and more than half engage in personal website surfing every day. Another reason that managers monitor employee email and computer usage is that they don’t want to risk being sued for creating a hostile workplace environment because of offensive messages, an inappropriate image, or concerns about racial or sexual harassment. This is one reason companies might want to monitor or keep backup copies of all email. Finally, managers want security. They need to ensure that company secrets aren’t being leaked via instant messaging, blogs, social media outlets, or phone cameras. Because of the potentially serious costs, many companies have workplace monitoring policies. These should be developed to control employee behavior in a nondemeaning way and with the employees’ full knowledge. Copyright ©2015 Pearson Education, Inc.

Controlling Employee Theft Up to 85 percent of all organizational theft and fraud is committed by employees, not outsiders, and is estimated to cost about $4,500 per worker per year. Employee theft is defined as any unauthorized taking of company property by employees for their personal use. It ranges from embezzlement or fraudulent filing of expense reports to removing equipment or office supplies from company premises. So, why do employees steal? Experts in various fields have different perspectives. Industrial security specialists propose that people steal because the opportunity presents itself through lax controls and favorable circumstances. Criminologists say that it’s because people have financial-based pressures (such as personal financial problems) or vice-based pressures (such as gambling debts). Clinical psychologists suggest that people steal because they can rationalize whatever they’re doing as being correct and appropriate behavior by telling themselves that “everyone does it” or “this company makes enough money and they’ll never miss it.” The concept of feedforward, concurrent, and feedback control is useful for identifying measures to deter or reduce employee theft. Here in Exhibit 14-7 we see several possible managerial actions, from careful prescreening of job candidates to openly communicating the costs of stealing. Copyright ©2015 Pearson Education, Inc.

Controlling Workplace Violence Recent data show that 17 percent of work-related deaths in the United States were workplace homicides and some 2 million American workers are victims of some form of workplace violence, such as verbal abuse, purposeful damage of machines or furniture, or assaults by coworkers. And office rage isn’t a uniquely American problem. A survey of aggressive behaviors in Europe’s workplaces found that between 5 percent and 20 percent of European workers are affected by workplace violence. The key factors contributing to workplace violence are: employee stress caused by job uncertainties, declining value of retirement accounts, long hours, information overload, daily interruptions, unrealistic deadlines, and uncaring managers. Other experts have described dangerously dysfunctional work environments characterized by: Employee work driven by time, numbers, and crises A destructive communication style (for example, where managers communicate in an excessively aggressive, condescending, explosive, or passive-aggressive style) Excessive workplace teasing or scapegoating Authoritarian leadership with a rigid mindset of managers versus employees Unresolved grievances Repetitive, boring work, and A hazardous work environment. Managers can deter or reduce possible workplace violence by using feedforward, concurrent, and feedback control to help identify actions that they can take, such as those summarized here in Exhibit 14-8. Copyright ©2015 Pearson Education, Inc.