1-1 Controlling

1-2 Purpose of Control ●Adapt to environmental change –Includes changing customer expectations ●Limiting the accumulation of error –Errors can pile up ●Coping with organizational complexity –Can have many products, raw materials, people, etc. ●Minimizing costs ●Must measure in order to control

1-3 Types of Control Theory ●Control by area –Physical, financial, information, staff –Examples of each ●Control by level –Strategic –Structural (are admin areas performing) –Operational –Financial ●Responsibility for control –All management –Controller

1-4 Steps in Control Process Practice ●Establish “control standards” –Must be measureable ●Measure performance –Can not fix if don’t measure ●Compare performance to standard ●Consider corrective action –Can have problems even with success

1-5 Operations Control ●Preliminary control –Control factors of production as they come into the business –E.g. screen hires, sample goods ●Screening Control –Check as things are made, not just at the end ●Postaction control –Monitor final output

1-6 Financial Control Budgets ●Types (examples) –Cash budget –Capital budget –Expense budget –Sales/revenue budget –Profit budget –Headcount budget –Space budget –Production budget ●Difference between expense and capital budgets

1-7 Developing Budgets Practice ●Two types –Incremental –Zero-based ●Traditionally top-down ●Can be iterative –Top-down targets –Bottom-up requests –Need to reconcile the two ●Problem with game playing –Set budget proposal high knowing it will get cut

1-8 Managing to Budgets (How could the book leave this out?) ●A good manager can meet budgets ●Track: –Current period actual vs. budget –YTD vs. actual –Project EOY (or month/quarter) –Projection vs. budget ●Act early! –Problems found early can be fixed –Can not fix a $2M problem on a $10M budget with only 2 months to go

1-9 Financial Controls ●Ratio analysis –Operating, profit, expense, liquidity, etc. –Benchmark relative to norm, competition ●Audits –Can find problems such as treating current expenses as capital purchases –Internal audits –External audits –Potential for conflict of interest (Enron and Arthur Anderson) –Can also duplicate the function (don’t check, compare)

1-10 Structural Control ●Bureaucratic control –Obtain employee compliance –Formal controls –Rules directed at min. acceptable perf. –Top-down influence –Formal participation –Individual rewards ●Decentralized control –Obtain employee commitment –Group norms, culture –Rules directed at perf. above min. –Flat structure –Informal participation –Group rewards Do you design controls for lowest common denominator or the majority?

1-11 Strategic Control ●Evaluate whether corporate strategies are being met –If not, why not? –Revise budgets, structure, operations, etc. to achieve objectives ●Centralized vs. decentralized control –Learning from other organizations –Speed of adaptation to conditions

1-12 Managing Control ●Integrate with planning ●Keep flexible –If problems, measure more ●Be accurate –If not accurate, worthless ●Must be timely –Need information early enough to act –Don’t track data not needed, wasted work ●Be objective –Not open to dispute

1-13 Resistance to Control ●Similar to resistance to change ●Problems if –Over control –Inappropriate focus  Measuring the wrong thing  Be careful what you ask for!! –May reward inefficiency  If under run budget in one year, may get cut the next –Staff may not like transparency of their efforts