Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1 Chapter 16 Prepared by Deborah Baker Texas Christian University Management 4th Edition Chuck Williams Control

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 2 What Would You Do?  Walgreens has been an exceptional investment, but past performance is no guarantee of future performance  Competition is increasing—from warehouse discounters, CVS, Wal- Mart, and PBM mail-order pharmacies  Non-prescription goods account for 33 percent of Walgreen’s sales Walgreens’ Headquarters, Deerfield, Illinois. How can Walgreen continue to grow same store sales? What can it do about its competition?

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 3 Basics of Control After reading this section, you should be able to: 1. describe the basic control process.

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 4 The Control Process Begins with establishment of clear standards of performance Involves a comparison of actual performance to desired performance Takes corrective action to repair performance deficiencies Is a dynamic, cybernetic process Consists of feedback control, concurrent control, feedforward control 1 1 But… control isn’t always worthwhile or possible

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 5 Setting Standards 1. A good standard must enable goal achievement. 2. Listening to customers or observing competitors. 3. Benchmarking other companies.  Determine what to benchmark.  Identify the companies against which to benchmark.  Collect data to determine other companies’ performance standards. 1.1

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 6 Comparison to Standards 1. Compare actual performance to performance standards. The use of “secret shoppers” helps verify that performance standards are being met. 1.2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 7 Corrective Action  Identify performance deviations  Analyze those deviations  Develop and implement programs to correct them 1.3 Control Process Correct Identify Analyz e

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 8 Dynamic, Cybernetic Process Adapted from Exhibit Develop & Implement Program for Corrective Action Set Standards Measure Performance Compare with Standards Compare with Standards Identify Deviations Analyze Deviations

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 9 Feedback, Concurrent, and Feedforward Control Feedback Control Gather information about performance deficiencies after they occur Concurrent Control Gather information about performance deficiencies as they occur Feedforward Control Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur 1.5

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 10 Feedforward Control Guidelines for Using Feedforward Control 1.Thorough planning and analysis are required. 2.Careful discrimination must be applied in selecting input variables. 3.The feedforward system must be kept dynamic. 4.A model of the control system should be developed. 5.Data on input variables must be regularly collected. 6.Data on input variables must be regularly assessed. 7.Feedforward control requires action. 1.Thorough planning and analysis are required. 2.Careful discrimination must be applied in selecting input variables. 3.The feedforward system must be kept dynamic. 4.A model of the control system should be developed. 5.Data on input variables must be regularly collected. 6.Data on input variables must be regularly assessed. 7.Feedforward control requires action. Adapted from Exhibit

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 11 Control Loss Is control worthwhile? Maybe, maybe not. Managers must assess the regulation costs and the cybernetic feasibility.

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 12 Control Methods After reading these sections, you should be able to: 2. discuss the various methods that managers can use to maintain control. 3. describe the behaviors, processes, and outcomes that today’s managers are choosing to control their organizations.

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 13 Control Methods Normative Concertive Self-Control Bureaucratic Objective 2 2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 14 Bureaucratic Control  Top-down control  Use rewards and punishment to influence employee behaviors  Use policies and rules to control employees  Often inefficient and highly resistant to change 2.1

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 15 Objective Control 2.2 Objective Control Use of observable measures of worker behavior or outputs to assess performance and influence behavior Behavior Control Regulation of the behaviors and actions that workers perform on the job Output Control Regulation of workers’ results or outputs through rewards and incentives Regulation of workers’ results or outputs through rewards and incentives

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 16 Doing the Right Thing Don’t Cheat on Travel Expense Reports  Workers are often tempted to pad their travel expense reports  It’s often justified by feeling that they are entitled  If you can’t trust an employee to be truthful on an expense report, how can you trust them with decisions involving millions of dollars? Don’t Cheat on Travel Expense Reports  Workers are often tempted to pad their travel expense reports  It’s often justified by feeling that they are entitled  If you can’t trust an employee to be truthful on an expense report, how can you trust them with decisions involving millions of dollars? 2.2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 17 Effective Output Control 1. Output control measures must be reliable, fair, and accurate. 2. Employees and managers must believe that they can produce the desired results. 3. The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance. 2.2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 18 Normative Control  Created by:  careful selection of employees  observing experienced employees & listening to stories about the company 2.3 Normative Control

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 19 Concertive Control  Autonomous work groups  operate without managers  group members control processes, output, and behaviors 2.4 Concertive Control Regulation of workers’ behavior and decisions through work group values and beliefs

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 20 Self-Control  Also known as self-management  Employees control their own behavior  Employees make decisions within well-established boundaries  Managers teach others the skills they need to maximize work effectiveness  Employees set goals and monitor their own progress 2.5

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 21 What to Control? Customer Defections Customer Defections Quality Waste and Pollution Balanced Scorecard Budgets, Cash Flow, EVA Budgets, Cash Flow, EVA 3 3

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 22 The Balanced Scorecard Customer Perspective Customer Perspective Internal Perspective Innovation and Learning Perspective Innovation and Learning Perspective Financial Perspective 3.1

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 23 Advantages of the Balanced Scorecard 1. Forces managers to set goals and measure performance in each of the four areas 2. Minimizes the chances of suboptimization  performance improves in one area, but at the expense of others 3.1

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 24 The Balanced Scorecard: Southwest Airlines 3.1

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 25 The Financial Perspective Cash flow analysis Predicts how changes in a business will affect its ability to take in more cash than it pays out Balance sheets Provide a snapshot of a company’s financial position at a particular time Income statements Show what has happened to an organization’s income, expenses, and net profit over a period of time Financial ratios Used to track liquidity, efficiency, and profitability over time compared to other businesses in its industry 3.2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 26 Basic Accounting Tools 1.Forecast sales 2.Project changes in anticipated cash flows 3.Project anticipated cash outflows 4.Project net cash flows by combining anticipated cash inflows and outflows Adapted from Exhibit Steps for a Basic Cash Flow Analysis

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 27 Basic Accounting Tools 1.Assets Current assets Fixed assets 2.Liabilities Current liabilities Long-term liabilities 3.Owner’s equity Stock Additional paid in capital Retained earnings 3.2 Parts of a Basic Balance Sheet Adapted from Exhibit 16.5

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 28 Basic Accounting Tools SALES REVENUE -sales returns and allowances +other income =NET REVENUE -cost of goods sold =GROSS PROFIT -total operating expenses =INCOME FROM OPERATIONS -interest expense =PRETAX INCOME -income tax =NET INCOME 3.2 Basic Income Statement Adapted from Exhibit 16.5

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 29 Financial Ratios LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LEVERAGE RATIOS Debt to Equity Debt Coverage LEVERAGE RATIOS Debt to Equity Debt Coverage EFFICIENCY RATIOS Inventory Turnover Average Collections Period EFFICIENCY RATIOS Inventory Turnover Average Collections Period PROFITABILITY RATIOS Gross Profit Margin Return on Equity PROFITABILITY RATIOS Gross Profit Margin Return on Equity Adapted from Exhibit

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 30 Common Kinds of Budgets Cash Budgets Used to forecast the cash a company will have for expenses Expense Budgets Used to determine spending on supplies, projects, or activities Profit Budgets Profit Budgets Used by profit centers, which have “profit and loss” responsibility Revenue Budgets Used to project or forecast future sales Variable Budgets Used to project costs across varying levels of sales/revenues Capital Expenditure Budgets Used to forecast large, long-lasting investments 3.2 Adapted from Exhibit 16.7

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 31 Economic Value Added (EVA) Economic Value Added The amount by which company profits exceed the cost of capital in a given year Common Costs of Capital  Long-term bank loans  Interest paid to bondholders  Dividends and growth in stock value that accrue to shareholders  Long-term bank loans  Interest paid to bondholders  Dividends and growth in stock value that accrue to shareholders 3.2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 32 Economic Value Added (EVA) 1. Calculate net operating profit after tax 2. Identify how much capital the company has invested 3. Determine the cost paid for capital 4.Multiply capital used (step 2) times cost of capital (step 3) 5. Subtract total dollar cost of capital from net profit after taxes $3,500,000 $16,800,000 10% (10% x $16,800,000) = $1,680,000 $3,500,000 net profit -$1,680,000 cost of capital $1,820,000 EVA $3,500,000 net profit -$1,680,000 cost of capital $1,820,000 EVA Adapted from Exhibit

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 33 Why Is EVA Important?  Shows whether a business, division, department, profit center, or product is paying for itself  Makes managers at all levels pay closer attention to their segment of the business  Encourages managers and workers to be creative in looking for ways to improve EVA performance 3.2

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 34 The Customer Perspective Controlling Customer Defections  Monitoring customer defections:  identify which customers are leaving the company  measuring the rate at which they are leaving  Obtaining a new customer costs five times as much as keeping a current one  Customers who have left are likely to tell you what you are doing wrong  Understanding why a customer leaves can help fix problems and make changes 3.3

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 35 The Internal Perspective Controlling Quality Excellence Value Conformance to Expectations 3.4

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 36 The Internal Perspective Controlling Quality 3.4 Exhibit 16.12

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 37 Controlling Waste and Pollution Good housekeeping Material/product substitution Process modification 3.5

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 38 Adapted from Exhibit Waste Disposal Waste Treatment Recycle & Reuse Waste Prevention & Reduction 3.5 Controlling Waste and Pollution