part Chapter © 2009 The McGraw-Hill Companies, Inc. All rights reserved. 1 McGraw-Hill Management Control 3 Chapter 11

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 2 McGraw-Hill Learning Objectives 1.Explain why management controls are necessary. 2.Describe the control pyramid. 3.Differentiate between preliminary, concurrent, and post-action controls. 4.List the four basic types of financial ratios. 5.Explain the determinants of performance. 6.Describe the major performance appraisal methods.

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 3 McGraw-Hill Controlling Control: Performance to standards comparison and corrective action Planning occurs before actions; control occurs after action Why Practice Management Control? Alert managers to potential critical problems Five actions for managers –Prevent crisis, standardize outputs, appraise employee performance, update plans, and protect the organization’s assets

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 4 McGraw-Hill The Control Pyramid Where Should Control Reside? James Champy – control at lower level Several advantages

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 5 McGraw-Hill Types of Control Two categories –Behavior control –Output control Not substitutes for each other Preliminary, Concurrent, or Post-action Control? Preliminary – steering control Concurrent – screening control Post-action – most controls

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 6 McGraw-Hill Types of Control Budgetary Control Most widely used Dangers –Inflexibility –Inefficiencies –“Padded” The answer Zero-Based Budgeting Justifiable budget request

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 7 McGraw-Hill Types of Control Financial Controls Other tools: Balance sheets, income statement, and financial ratios Financial Ratio Analysis –Four basic types: profitability, liquidity, debt, and activity Sarbanes-Oxley Act of 2002 Prevents financial meltdowns Major concern: hefty compliance costs

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 8 McGraw-Hill Types of Control Direct Observation Time consuming Hazards Written Reports Two basic types: analytical and informational Four or five-step process depending on type Electronic Monitors Monitor what is going on

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 9 McGraw-Hill Types of Control Balanced Scorecard Balance four categories Advantages Management Information Systems Reports and mathematical simulations outputs Audits Management audits Break-Even Charts Break-even points

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 10 McGraw-Hill Appraising Performance Understanding Performance Performance versus Effort Determinants of Performance Net effect of effort modified by: – Abilities – Role perception – Results

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 11 McGraw-Hill Appraising Performance Performance Appraisal Process Informs employees how well they are performing and clarifies needed improvements Common uses Provide input for training and development Encourage performance improvement Must be supported by documentation and management commitment Additional concern – how often to conduct

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 12 McGraw-Hill Performance Appraisal Methods Goal Setting, or Management by Objectives Value of linking MBO to appraisal process MBO process consists of 6 steps: –Establish objectives for work an employee is to do –Develop an action plan –Allow employee to implement the plan –Appraise performance based on achievement –Take corrective action where needed –Establish new objectives for future Requirements to be met

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 13 McGraw-Hill Performance Appraisal Methods Production Standards Normal output Advantage Essay Appraisal Written account form Primary problem – varying length and content – Difficult to compare

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 14 McGraw-Hill Performance Appraisal Methods Critical-Incident Appraisal Written record of incidents Drawbacks Graphic Rating Scale Assess on various factors Weaknesses Checklist Yes or no to a series of questions Bias

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 15 McGraw-Hill Performance Appraisal Methods Ranking Methods Most commonly used –Alternation ranking –Paired comparison ranking –Forced distribution –Multirater assessment

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 16 McGraw-Hill Selecting a Performance Appraisal Method Job-related –Job analysis and job descriptions Potential Errors in Performance Appraisals Leniency Central tendency Recency Halo effect Personal preference, prejudices, and biases

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 17 McGraw-Hill Conducting Effective Performance Appraisals Training for managers Dos and don’ts Providing Feedback Through The Appraisal Interview Important factors Skeptical employees Developing Performance Improvement Plans Components