1 Mgmt 371 Chapter Twenty Basic Elements of Control Much of the slide content was created by Dr, Charlie Cook, Houghton Mifflin, Co.©

2 The Nature of Control in Organizations Control The regulation of organizational activities so that some targeted element of performance remains within acceptable limits. Comparing actual results to intended results and determining the cause of any substantial deviation.

3 The Benefits of Control in Organizations Provides organizations with indications of how well they are performing in relation to their goals. Provides a mechanism for adjusting performance to keep organizations moving in the right direction.

4 The Purpose of Control

5 The Nature of Control in Organizations (Areas of Control) Types of Controls Physical resources inventory management quality control equipment [usage] control. Human resources selection and placement training and development performance appraisal compensation.

6 The Nature of Control in Organizations (Areas of Control) Types of Controls Information resources sales and marketing forecasts environmental analysis public relations production scheduling economic forecasting. Financial resources managing capital funds and cash flow collection and payment of debts.

7 Levels of Control

8 Strategic- ensures the organization is maintaining acceptable progress to its strategic goals. Structural-ensures that the organization’s structure serves its intended purpose. Operations- ensures that the process the firm uses to produce goods and services is efficient. Financial-ensures that the organization is operating within financial resource constraints.

9 The Nature of Control in Organizations Responsibilities for Control Controller—a position in organizations that helps line managers with their control activities.

10 Steps in the Control Process

11 Steps in the Control Process Establish standards Control standard—a target against which subsequent performance will be compared. Should be expressed in measurable terms. Should be consistent with organizational goals. Should be identifiable indicators of performance.

12 Steps in the Control Process Measure performance Performance measurement is a constant, ongoing process. Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance.

13 Steps in the Control Process Compare performance against standards Define what is a permissible deviation from the performance standard. Identify the cause of any impermissible deviation. You cannot correct the deviation unless you know what caused it. Utilize the appropriate timetable for measurement.

14 Steps in the Control Process Consider corrective action Maintain the status quo (do nothing). Correct the deviation to bring operations into compliance with the standard. Change the standard if it was set too high or too low.

15 Forms of Operations Control a.k.a., Concurrent Control

16 Financial Control Control of financial resources (revenues, shareholder investments) as they: Flow into the organization revenues Are held by the organization as working capital, retained earnings Flow out of the organization as payment of expenses

17 Financial Control Budgetary Control Budgets May be established at any organizational level. Are typically for one year or less. May be expressed in financial terms, units of output, or other quantifiable factors. Purposes of budgets Help managers coordinate resources and projects. Help define the established standards for control. Provide guidelines about the organization’s resources and expectations. Enable the organization to evaluate the performance of managers and organizational units.

18 Developing Budgets in Organizations

19 Developing Budgets in Organizations

20 Strengths and Weaknesses of Budgeting Strengths Budgets facilitate effective operational controls. Budgets facilitate coordination and communication between departments. Budgets establish records of organizational performance, which can enhance planning. Budgets link plans and control as part of plans and then serving as part of control Weaknesses Budgets can hamper operations if applied too rigidly. Budgets can be time consuming to develop. Budgets can limit innovation and change.

21 Other Tools of Financial Control Financial Statements Financial statement A profile of some aspect of an organization’s financial circumstances. Balance sheet A listing of assets (current and fixed), liabilities (short- and long-term), and stockholders’ equity at a specific point in time (typically, year-ending) that summarizes the financial condition of the organization. Income statement Summary of financial performance—revenues less expenses as net income (i.e., profit or loss)—over a period of time, usually one year.

22 Other Tools of Financial Control Ratio Analysis The calculation of one or more financial ratios to assess some aspect of the organization’s financial health. Liquidity ratios Debt ratios Operating ratios Financial Audit An independent appraisal of an organization’s accounting, financial, and operational systems. External audits Internal audits

23 Structural Control Bureaucratic Control A form of organizational control characterized by formal and mechanistic structural arrangements. Decentralized control An approach to organizational control based on informal and organic structural arrangements.

24 Organizational Control

25 Strategic Control: Integrating Strategy & Control Strategic control Is aimed maintaining an effective alignment with the environment and moving toward achieving strategic goals. Focuses on structure, leadership, technology, human resources, and informational and operational systems. Focuses on the extent to which implemented strategy achieves the organization’s goals.

26 Strategic Control: Integrating Strategy & Control International Strategic Control Focuses on whether to manage the global organization from a centralized or decentralized perspective. Centralization creates more control and coordination, whereas decentralization fosters adaptability and innovation.

27 Managing Control in Organizations The Five Characteristics of Effective Control Integration with planning Flexibility Accuracy Timeliness Objectivity

28 Managing Control in Organizations (Resistance) Resistance to Control Due To: Overcontrol Inappropriate Focus Rewards for Inefficiency Too much accountability

29 Overcoming Resistance to Control Designing controls integrated with organizational planning and aligned with goals and standards. Creating flexible, accurate, timely, and objective controls. Avoiding overcontrol in the implementation of controls. Guarding against controls that reward inefficiencies.

30 Overcoming Resistance to Control Encouraging employee participation in the planning and implementing of control systems. Developing a system of checks and balances that can verify the accuracy of performance indicators.