Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Chapter 16 Management Control

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 2 Learning Objectives After reading this chapter, you should be able to: Describe management control and understand the importance of control systems. Identify the four basic management control approaches. Describe the steps a manager would take to apply a bureaucratic control process. Identify the major types of bureaucratic control. Generate the basic framework for a balanced scorecard. Differentiate between market and financial control. Distinguish between system and person factors as the focus of control.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 3 The Importance of Control Control is the process of comparing performance to standards and taking corrective action. It ensures that:  standards are met  errors are limited  quality is acceptable  products are safe  the company is performing at the highest possible level Control is closely associated with planning.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 4 Categorization of Control Approaches Control approaches can be categorized according to two factors – type and focus: Type - divided into formal and informal approaches  Formal control systems consist of written rules  Informal control systems rely on unwritten expectations Focus – directed at the outcome or the process  Outcome approach focuses on the results of a business process  Process approach focuses on how the work is performed

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 5 Control Approaches Model Informal Formal Type Outcomes Process Focus Subjective Control Clan Control Marketing Control Financial Controls Operations Management Bureaucratic Control Balanced Scorecard

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 6 Informal and Outcome- Focused Control Characterized by subjective control - an informal approach based on global assessment of outcomes Subjective control:  does not typically utilize explicit standards  does not specify how deviations from an acceptable level should be handled  is common in smaller businesses and service settings  is the “no news is good news” approach

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 7 Formal and Process-Focused Control: Bureaucratic Control Bureaucratic control is a formal control approach that operates in a cycle and is characterized by written guidelines and controls. Involves:  the application of standards to assess performance  the application of corrective actions to regulate performance and bring it back to the level of the standards.

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 8 The Bureaucratic Control Process 1. Establishing Standards 2. Performance Measurement 3. Identifying Gaps 4. Corrective Action

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 9 The Bureaucratic Control Process (cont) Establishing Standards  Standards should be participative rather than simply implemented from the top down so that employees understand and are committed to them.  Standards come from: goals statistical analysis benchmarking Performance Measurement  Use of objective data, which is free from error or bias  Use of subjective data, which involves human judgement

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 10 The Bureaucratic Control Process (cont) Identifying Gaps  Compare standards with performance measures  Upper and lower control limits establish: acceptable variations normal variations unacceptable variations Corrective Action  What should management do? Nothing Take action Change standards

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 11 Types of Bureaucratic Control Feedforward Control Concurrent Control Feedback Control

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 12 Types of Bureaucratic Control (cont.) Feedforward control  Designed to prevent problems before they occur Concurrent control –Takes place as the work process is being carried out Feedback control –Occurs after a process has been completed

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 13 The Balanced Scorecard A balanced scorecard is a technique designed to control and improve:  customer service  learning and growth  finance  internal business processes Links strategy to action Is more broad than bureaucratic control Focus on:  priorities  the work process  how things are done

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 14 Balanced Scorecard Format Objectives Measures Targets Initiatives Financial - what we need to do to succeed financially Customer - what we need to do to excel at customer service Internal Business Processes - what we need to do to have world class processes Learning and Growth - how to change and increase our potential and effectiveness

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 15 Formal and Outcome- Focused Control The regulation of performance by applying the standards or guidelines to the outcomes of a process through:  Market control - the use of indicators of market values as standards for regulating performance  Financial controls - the use of various monetary measures to regulate performance

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 16 Types of Financial Controls Budgetary Control Financial Statements Financial Ratios Activity-Based Costing

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 17 Types of Financial Controls (cont.) Budgetary control - used to specify amounts to be expended for various activities or events  Can help managers control and predict costs Financial Statements - tools that are used to assess and control the financial health of an organization –Balance sheets –Profit and loss (income) statements

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 18 Types of Financial Controls (cont.) Financial Ratios - provide an overall check of performance  Liquidity ratios - an organization’s ability to pay short-term debt  Leverage ratios - the amount of funds available in an organization from shareholders and creditors  Profitability ratios - indicate the amount of financial return from an investment Activity-Based Costing - associates costs with tasks  calculated for: receiving and processing sales orders expediting supplies and production distribution resolving errors and problems

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 19 Informal and Process- Focused Control Emphasizes an implicit sense and common understanding of how things should be done Does not rely on explicit guidelines and standards Assumes that people have an internal set of standards that will guide how they perform

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 20 Clan Control Clan control is a reliance on corporate culture and the norms it develops as an informal means for regulating the work process Employees control themselves Clan control works best if:  the organization is constantly changing  the organization has a strong culture

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Slide 21 Management Control Revisited Should control be directed at people, systems, or some other aspect of the company?  Emphasis should be on systems and performance rather than people.  Focusing on people can result in resistance and negative reactions