Chapter Organizational Control and Change

11-2 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Overview The four steps of the organizational control process The advantages and disadvantages of output and behavior controls in coordinating and motivating employees How corporate culture can help create effective structure The relationship between control and change

11-3 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Control Monitoring and regulating how efficiently and effectively employees achieve organizational goals  Anticipating trends, opportunities and threats and changing the organization to respond effectively  Rebuilding the plane while flying if necessary

11-4 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Control Begins With Questions Are we efficiently converting inputs into outputs? Are we measuring input and output accurately? Is our quality competitive and improving? Are we innovative or is excessive control smothering our creativity? Do our controls encourage risk-taking or simply incentivize caution?

11-5 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin How to Succeed Market->strategy->structure->culture Constant Core/Adaptive Margin COMPETITIVE ADVANTAGE

11-6 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Control Systems The Reins on the Horse Goal-setting, monitoring, evaluation and feedback tell you how well the organization’s strategy and structure are working A good control system should: > be flexible so managers can respond as needed > provide accurate and timely information about organizational performance as measured by KPIs

11-7 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Types of Control Feedforward Controls (before) Used in the input stage to anticipate problems and head them off before they arise. Example: rigorous specifications to avoid quality problems Concurrent Controls (during) Real-time information on how inputs are being converted into outputs enable managers to correct problems as they arise Example: days’ supply of new vehicles

11-8 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Types of Control Feedback Controls (after) Provide after-the-fact information managers can use in the future Example: surveying customers’ reactions in order to improve products and service

11-9 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin PDCA Feedback provides the necessary information to create feed-forward controls, completing the PDCA loop to achieve continuous improvement

11-10 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Control Process (PDCA) “What Gets Measured Gets Done” 1.Carefully establish performance standards and goals against which performance is evaluated (KPIs)  Managers help set their own standards  Standards must be consistent with the organization’s overall strategy; for a low- cost strategy, KPIs focus on cost reduction

11-11 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Control Process 2. Measure actual performance  Preferably measure actual outputs but you also can measure behavior designed to deliver an output The more non-routine the task, the harder it is to quantify output; measuring behavior is an alternative -- employee arrives on time and puts in 8 hours of energetic work

11-12 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Control Process 3. Compare performance against standards  Managers must decide if performance actually deviates; sometimes several problems combine to create low performance; find root causes. 4. Evaluate results and take corrective action  Standards too high or low?  Workers need additional training/tools?  Understand problem before trying to solve it.

11-13 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Output Control Organizational Goals Each division within the firm is assigned specific goals (KPIs) that must be met in order to attain overall organizational goals You and your people set them together Goals should be specific and difficult, but not impossible (stretch – don’t break – the employee)

11-14 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Output Control Operating Budgets State how managers plan to allocate and use resources to attain goals effectively and efficiently. Each division is evaluated on its own budgets for cost, revenue and profit Managers are evaluated by how well they meet goals for controlling costs, generating revenues, or maximizing profits while staying within their budgets. Big picture/break down silos Zero-based budgets?

11-15 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Problems with Output Control Managers must create output standards that motivate at all levels.  Be careful not to create short-term goals that motivate managers to sacrifice long- term success  Set standards too high and workers may cheat to attain them or quit to escape them

11-16 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Behavior Control Direct Supervision  Managers who directly manage can teach, reward, lead by example, and take timely corrective action, but… Labor-intensive, expensive and inefficient Discourages workers who desire less scrutiny and more autonomy Difficult to do effectively in complex job settings Answer: don’t do it; instead trust but verify Example: Danny Myer

11-17 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Management by Objectives Management By Objectives (MBO) -- Drucker Managers and subordinates negotiate specific goals for the subordinate to achieve then periodically evaluate performance Manager and worker jointly set specific goals Then periodically review performance Raises, bonuses, promotions tied to goal attainment Teams also measured this way

11-18 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Bureaucratic Control Control achieved by use of Standard Operating Procedures (SOPs) that shape the behavior of divisions, teams and individuals Rules and SOPs tell the worker what to do so outcomes are relatively predictable Still need output controls to correct mistakes Best used for routine processes in stable environments.

11-19 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Bureaucratic Control Problems with Bureaucratic Control Builds up “red tape” that slows organizational reactions; stifles initiative and creativity Firms become too standardized and lose ability to learn and create new ideas to solve problems Operate “by the book” instead of by reality; apply yesterday’s solutions to tomorrow’s problems

11-20 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Culture Internalized values, norms, standards and shared expectations controlling the way individuals and groups work together to achieve goals (Toyota Way, GE Way, GM Way) Not always positive and productive

11-21 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Adaptive Culture Strong and cohesive culture that controls employee attitudes and behaviors, but learns from and adapts to changing circumstances; constant core and adaptive margin J&J, GE, H-P, Toyota

11-22 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Change Improving an organization’s efficiency and effectiveness by moving it away from its present state toward some desired future state; “what we want to be when we grow up”

11-23 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Change Evolutionary Change (PDCA) Gradual, incremental, narrowly focused Constant attempt to improve strategy, structure and performance in order to adapt to changes in the environment Japanese call it Kaizen – a constantly creeping tortoise inching competitors to death

11-24 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Change Revolutionary Change Rapid, dramatic and broadly focused A bold attempt to quickly find ways to increase effectiveness Likely to result in new ways, new goals and new structure Usually results from not continuously carrying out evolutionary change

11-25 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Learning How managers try to increase employees’ abilities to understand and appropriately respond to changing conditions  “Build a burning platform” for change (emotional “pulling” leadership)  Vision – what will we look like when the change is achieved?  Both necessary to inspire the organizational willpower to change

11-26 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Top-down Change Top managers identify what needs to be done and move quickly to implement changes throughout the organization Not the best way, but usually necessary in a crisis

11-27 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Bottom-up Change Managers at all levels work together to create a detailed plan for change, developing ownership of need and plan and helping to smooth implementation. The best way if you have enough time

11-28 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Final Warning You get what you choose to measure and reward Define success clearly and correctly Then be certain the structure and controls you adopt enable you to select and measure KPIs that motivate the right performance