PowerPoint slides by R. Dennis Middlemist Colorado State University Chapter 16 Control

2 ©2005 Prentice Hall Learning Objectives Discuss the effects of too much or too little control in an organization. Describe the four basic elements of the control process and the issues involved in each. After studying this chapter, you should be able to:

3 ©2005 Prentice Hall Learning Objectives Differentiate between the different levels of control and compare their implications for managers. Explain the concept of standards and why they are so important in organizations. After studying this chapter, you should be able to:

4 ©2005 Prentice Hall Learning Objectives Compare bureaucratic and clan controls. Identify the important qualities required for information to be useful in the control process. After studying this chapter, you should be able to:

5 ©2005 Prentice Hall Control Function in Management Control Regulation of activities and behaviors within organizations Adjustment or conformity to specifications or objectives Effective control depends heavily on other functions that precede it and feeds back to them Planning Organizing Leading

6 ©2005 Prentice Hall Ensures adjustment or conformity to specifications Regulates activitiesRegulates behavior Control Function in Management Adapted from Exhibit 16.1: The Control Function in Management Ensures adjustment or conformity to objectives Control

7 ©2005 Prentice Hall Control’s Feedback Loop Adapted from Exhibit 16.2: Control’s Feedback Loop OrganizingPlanningControl Feedback Changes in

8 ©2005 Prentice Hall Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Establish standards Specification starts at the top of the organization and involves every level of employee Standards are the targets of performance Involving employees in setting standards Commits the employees to achieving the standards Results in more appropriate standards

9 ©2005 Prentice Hall Specificity of Standards and Performance Measurement Adapted from Exhibit 16.4: The Effect of Specificity of Standards on Performance Measurement High Low ConcreteAbstract Specificity of standards Level of confusion in performance measurement

10 ©2005 Prentice Hall Establishing Standards Adapted from Exhibit 16.5: Issues in Establishing Standards Standards How specific should they be? Who should set them? How difficult should they be to reach?

11 ©2005 Prentice Hall Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Establish standardsMeasure performance Obtain consensus about how to assess performance If performance involves multiple activities, measure must be comprehensive Measurement is costly and hence usefulness of the information must justify the costs

12 ©2005 Prentice Hall Measurement of Performance Adapted from Exhibit 16.6: Issues in the Measurement of Performance Performance Measurement Can expensive, but noncritical, controls be eliminated? Are all necessary aspects of actions contributing to performance being measured? Is there consensus among those involved as to how performance will be measured? Can measurement criteria be quantified?

13 ©2005 Prentice Hall Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Establish standardsMeasure performance Compare performance against standards Comparisons are affected b the kinds of measurements available Managers must interpret the patterns of comparisons (some negative/some positive) Comparisons often involve subjective and objective measures

14 ©2005 Prentice Hall Basic Elements in Control Process Adapted from Exhibit 16.3: The Basic Elements in the Control Process Establish standardsMeasure performance Compare performance against standards Evaluate results and take any necessary corrective action Evaluate results/take necessary corrective action Not all results require action Evaluate importance and magnitude of the deviation Determine what action to take if necessary Diagnosis skills of managers Level of expertise Evaluate the standards and the measures Employees performing better than “standard” should be recognized and rewarded

15 ©2005 Prentice Hall Outcomes of Performance Measurement Adapted from Exhibit 16.7: Outcomes of Performance Measurement Actual performance measured against standard for performance Gap Detected Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines) Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment) Actual performance better than expected performance + - Actual performance worse than expected performance

16 ©2005 Prentice Hall Scope of Control Assess and regulate how the organization fits its external environment and meets its long-range objectives and goals Control becomes less efficient in uncertain or changing environments Strategic Control

17 ©2005 Prentice Hall Types and Scope of Control Adapted from Exhibit 16.8: Types and Scope of Control Scope (Narrow)(Broad) Operational Controls Tactical Controls Strategic Controls

18 ©2005 Prentice Hall Centralization of Control and Environmental Stability Adapted from Exhibit 16.9: Degree of Centralization of Control in Relation to Environmental Stability Environmental stability Degree of centralization Decentralized Centralized StableTurbulent

19 ©2005 Prentice Hall Approaches to Strategic Control Adapted from Exhibit 16.10: Approaches to Strategic Control EasyDifficult Ability to specify and measure precise strategic objectives Environmental turbulence High Low

20 ©2005 Prentice Hall Scope of Control Assess and regulate day-to-day functions of the organization and its major units in implementing its strategy Financial controls Budgetary controls Supervisory structure controls Human resource controls Contrasting approaches to using tactical controls Bureaucratic control Commitment, or clan, control Tactical Control

21 ©2005 Prentice Hall Strategic and Tactical Controls Adapted from Exhibit 16.11: Characteristics of Strategic and Tactical Controls Tactical Controls Strategic Controls Time Frame Objective Types of Comparisons Focus LimitedLong, unspecific Controls relate to specific, functional areas Controls relate to organization as a whole Comparisons made within organization Comparisons made to other organization Implementation of strategy Determination of overall organizational strategy

22 ©2005 Prentice Hall RatioFormulaCompany Company Financial Ratios Adapted from exhibit 16.12: Examples of Company Financial Ratios The GAP, Inc in $ millions The Limited, Inc in $ millions Profit Return on Investment Net Profit before taxes Total Assets 241 7, , Liquidity Current Ratio Current Assets Current Liabilities 3,044 2, ,682 1, Liabilities Leverage Debt to Assets Total Debts Total Assets 2,525 7, ,975 4,

23 ©2005 Prentice Hall RatioFormulaCompany Company Financial Ratios Adapted from exhibit 16.12: Examples of Company Financial Ratios The GAP, Inc in $ millions The Limited, Inc in $ millions Activity Inventory Turnover Sales Inventory 13,847 1, ,

24 ©2005 Prentice Hall IssueQuestions Budgetary Control Adapted from exhibit 16.13: Issues in Budgetary Control Rolling budgets and revision Should the budget period be for 12 months followed by another 12-month budget a year later, or should a calendar quarter be added each time a new calendar quarter begins? Should the budget remain fixed for the budget period or should it be revised periodically during the period? Fixed or flexible budgets Should performance be evaluated against the original budget or against a budget that incorporates the actual activity level of the business? Bonuses based on budgets Should incentive compensation, if any, be based on actual versus budgeted performance, or on actual performance against some other standard?

25 ©2005 Prentice Hall IssueQuestions Budgetary Control Adapted from exhibit 16.13: Issues in Budgetary Control Evaluation criteriaShould the budget used to evaluate performance include only those items over which the evaluated manager has control, or should it include all unit costs and revenues appropriate to the managerial unit? Tightness of the budget What degree of “stretch” should there be in the budget? Source: Adapted from N. C. Churchill, “Budget Choices: Planning vs. Control,” Harvard Business Review 62, no. 4 (1984), pp. 150–164, (p. 151).

26 ©2005 Prentice Hall Training Control in the Human Resource Function Adapted from Exhibit 16.14: Opportunities for Control in the Human Resource Function CompensationSelection Human Resource Function Controls Appraisal and evaluation

27 ©2005 Prentice Hall Type ofSocialControlInformational ControlRequirements a ApproachRequirements Control in Bureaucracy and Clan Structures Adapted from exhibit 16.15: Control in Bureaucracy and Clan Structures BureaucracyNorm of reciprocity Legitimate authority Adherence to rules and regulations Formal and impersonal Emphasis on detecting deviance Imposed on the individual Rules ClanNorm of reciprocity Legitimate authority Shared values, beliefs Stresses group consensus on goals and their measurement Mutual assistance in meeting performance standards Uses deviations as guidelines in diagnosing problems Control comes from the individuals or groups Traditions Source: Adapted from William G. Ouchi, “A Conceptual Framework for the Design or Organizational Control Mechanisms,” Management Science 25, no. 9 (1980), pp. 833–847 (p. 838). a Social requirements are the basic agreements between people that, at a minimum, are necessary for a form of control to be employed.

28 ©2005 Prentice Hall Scope of Control Assess and regulate specific activities and methods used to produce goods and services Precontrol of operations Concurrent control of operations Postcontrol of operations Operational Control

29 ©2005 Prentice Hall Operational Controls Adapted from Exhibit 16.16: Operational Controls Concurrent Control Evaluates the conversion process as it occurs Provides immediate feedback, which impacts worker motivation Precontrol Controls the quality, quantity, and other characteristics of the inputs to the process Postcontrol Traditionally, quality control Many of these controls are being changed to pre- and concurrent controls

30 ©2005 Prentice Hall Control Effectiveness Focus of control Balanced scorecard Financial perspective Customer perspective Internal business perspective Innovation and learning perspective Amount of control

31 ©2005 Prentice Hall Control Effectiveness Quality of information Usefulness Accuracy Timeliness Objectivity Flexibility Favorable cost-benefit ratio Source of control

32 ©2005 Prentice Hall Key FactorConcerns Effectiveness of Controls Adapted from exhibit 16.17: Key Factors in Determining the Effectiveness of Controls Focus of control What will be controlled? Where should controls be located in the organizational structure? Who is responsible for which controls? Amount of control Is there a balance between over- and undercontrol? Quality of information collected by the controls Is the information useful? Is the information accurate? Is the information timely? Is the information objective? Flexibility of controls Are the controls able to respond to varying conditions? Favorable cost- benefit ratio Is the information being gathered worth the cost of gathering it? Source of control Is control imposed by others? Is control decided by those who are affected?