The Nature of Control Control - the regulation of activities within an organization to guarantee that some targeted performance remains within an acceptable limit to facilitate goal attainment.

The Nature of Control Without control, organizations have no indication of how well they are performing in relation to their goals. Control keeps the organization moving in the proper direction. At any point in time, it compares where the organization is in terms of performance [financial, production, etc.]. Control provides an organization with ways to: adapt to environmental change to limit the accumulation of error to deal with organizational complexity and to minimize costs.

The Nature of Control Adapting to Environmental Change If managers could make goals and meet them immediately, control would not be needed. In today’s business, between the time a goal is established and the time it is reached, many things can happen in the organization and its environment to disrupt movement toward the goal – or even to change the goal itself. A properly designed control system can help managers anticipate, monitor and respond to changing circumstances.

The Nature of Control Limiting the Accumulation of Error Small mistakes do not often damage seriously the financial health of an organization. However, over time the accumulation of mistakes may become very serious. A great rise in demand for a product may cause a drop in quality. Over time this may cause organizations to spend more on repairing defects than on producing new products.

The Nature of Control Coping with Organizational Complexity Because organizations do not generally purchase one raw material, produce one product, have only one competitor, or enjoy constant demand for its product, a sophisticated system of control must be utilized. A merger can have short-term disappointing results because the new business becomes so large that the existing control systems are not adequate.

The Nature of Control Minimizing Costs New technology can eliminate waste, lower labor costs and improve output per unit of input. Businesses are cutting back on everything from health insurance coverage to overnight shipping to business lunches for clients.

The Purpose of Control Adapt to environmental change Limit the accumulation of error Control helps the organization Cope with organizational complexity Minimize costs

Types of Control Areas of Control – generally defined in terms of four basic types of resources they use: Physical resources control areas include: Inventory management (stocking the right amount of units) Quality control (maintaining appropriate levels of output quality) Equipment control (supplying the necessary facilities and machinery)

Types of Control Human resources control areas include: Selection and placement Training and development Performance appraisal Compensation

Types of Control Information resources control areas include: Sales and marketing forecasting Environmental analysis Public relations Production scheduling Economic forecasting

Types of Control Financial control areas include: Managing the organization’s debt so it does not become excessive. Ensuring that the firm always has enough cash on hand to meet its obligations but does not have excess cash in a checking account. Ensuring that receivables are collected and bills are paid in a timely manner.

Levels of Control Four [4] levels of control include: Operations Control – focuses on the processes the organization uses to transform resources into products or services. Financial Control – concerned with the organization’s financial resources. Structural Control – concerned with how the elements of the organization’s structure are serving their intended purpose. Strategic Control – focuses on how effectively the organization’s strategies are succeeding in helping the organization meet its goals.

Figure 20.2: Levels of Control

Responsibilities for Control Generally, ultimate responsibility for control rests with all managers throughout an organization. Larger organizations with more complex control systems are creating a specialized managerial position. A controller is responsible for helping line managers with their control activities, for coordinating the organization’s overall control system and for gathering and putting together relevant information. As well, some organizations are using operating employees to control their own work and assume responsibility for correcting their own errors.

Steps in the Control Process Four steps in the control process: Establish standards A control standard is a target against which all subsequent performances will be compared. Standards established for control purposes should be stated in measurable terms [e.g. time limit, % of accuracy, etc.] Standards should be consistent with the organization’s goals and may be as narrow or as broad as the level of activity to which they apply. Standards should be directly relevant to what is being controlled.

Steps in the Control Process Measuring Performance A constant, ongoing activity for most organizations. For control to be effective, performance measures must be valid. Daily, weekly and monthly sales figures measure sales performance. Production may be measured in terms of unit cost, product quality or volume produced.

Steps in the Control Process Comparing Performance Against Standards Performance may be higher than, lower than or identical to the standard. The timetable for comparing performance to standards depends on a variety of factors Annual comparisons may be appropriate for longer-run and higher-level standards. Daily comparisons may be necessary for items such as a severe cash shortage, etc.

Steps in the Control Process Considering Corrective Action Decisions regarding corrective action draw heavily on a manager’s analytical and diagnostic skills. Three actions are appropriate: maintain the status quo, correct the deviation or change the standard. See Figure 20.3, page 657.

Figure 20.3 Steps in the Control Process

Operations Control Operations control focuses on the processes the organization uses to transform resources into products or services. Three forms of operations control include: Preliminary Control Transformation Control Outputs Control

Preliminary Control Preliminary Control attempts to monitor the quality or quantity of financial, physical, human and information resources before they actually become part of the system. Human – high hiring standards Physical – high manufacturing standards including quality of raw materials and manufacturing processes Financial – control of stock sales to outsiders Information – double checking information before using it to make management decisions

Screening Control Screening Control focuses on meeting standards for product or service quality or quantity during the actual transformation [manufacturing] process itself. Relies heavily on feedback processes during the transformation process. Screening controls tend to be used more often than other forms of control because they are useful in identifying the cause of problems early in the manufacturing process and are an effective way to promote employee participation.

Post-action Control Post-action Control focuses on the outputs of the organization after the transformation process is complete. Provides management with information for future planning. Provides a basis for rewarding employees who have exceeded goals by a wide margin. Most organizations use a wide variety of techniques to facilitate operations control. See Figure 20.4, page 660.

Figure 20.4 Forms of Operational Control

Structural Control Bureaucratic Decentralized Different goals Structural Control in organizations falls on or between two continuums. They are: Bureaucratic Decentralized These continuums address six dimensions: Different goals Degrees of formality Performance expectations Organization designs Reward systems Levels of participation Although a few organizations fall exactly at one extreme or the other, most tend toward one end but may have specific characteristics of either. See Figure 20.6, page 668.

Figure 20.6: Organizational Control

Bureaucratic Control Bureaucratic Control is an approach to organization control characterized by formal and mechanistic structural arrangements. The goal is employee compliance to strict rules. Has a rigid hierarchy, usually a tall structure. Insists employees meet minimally acceptable levels of performance. Focuses rewards on individual performance and allows only limited and formal employee participation.

Decentralized Control Decentralized Control is an approach to organizational control characterized by informal and organic structural arrangement. The goal is employee commitment. It relies heavily on group norms and a strong corporate culture. Gives employees the responsibility for controlling themselves. Employees are encouraged to perform beyond minimal acceptable levels. Organizations are usually relatively flat. Rewards are directed at group performance and favor widespread employee participation.

Strategic Control Strategic Control focuses on ensuring that the organization is maintaining an effective alignment with its environment and is moving toward achieving its strategic goals. Focuses on five aspects of organizations – structure, leadership, technology, human resources and information and operational control systems. Assures that an organization periodically examines itself to determine whether or not it is facilitating the attainment of the strategic goals. If one, or more, of the aspects is not helping toward the attainment of goals, it should be changed.

International Strategic Control Because of their relatively large size and the increased complexity associated with international business, global organizations must take a strategic view of their control systems. Centralized approach has units around the world reporting frequently to the main office, with frequent visits to foreign branches. This approach allows the main office more control over how decisions are made. Decentralized approach has units reporting less frequently and in less detail, with fewer visits from the main office. This approach allows the foreign units more control over the decisions to be made.