16 Chapter Management Control McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should be able to: Understand the importance of control systems. Distinguish between system- and person-based control systems. Distinguish between process- and outcome-based control systems. Evaluate various control approaches. Understand why measurement is necessary for control. Develop measures that support effective control systems. Develop and implement a balanced scorecard. © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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. © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

Control Approaches Model Informal Formal Type Outcomes Process Focus Subjective Control Clan Control Marketing Control Financial Controls Operations Management Bureaucratic Control Balanced Scorecard © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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. © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

The Bureaucratic Control Process 1. Establishing Standards 2. Performance Measurement 3. Identifying Gaps 4. Corrective Action © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

The Bureaucratic Control Process (continued) 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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

The Bureaucratic Control Process (continued) 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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

Types of Bureaucratic Control Feedforward Control Concurrent Control Feedback Control © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

Types of Financial Controls Budgetary Control Financial Statements Financial Ratios Activity-Based Costing © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

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 © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

Disciplinary Procedures Promptness – within a reasonable period of time Impartiality – avoid favoritism Non-punitive – purpose is to prevent future problems, not get revenge Fairness – degree of discipline related to offense Advance warning – employees should be aware of rules and rule changes Follow-through – to emphasize the relation of discipline to preventing future problems

Progressive Discipline Oral warning – generally in informal atmosphere – includes statement of rule violated, problem caused by violation, future consequences of repeated violation Written warning – written statement, copy of the warning with employee’s signature placed in employee’s file Suspension – length of suspension varies with seriousness of rule violation Final warning – sometimes issued stating that a future violation could result in dismissal Dismissal – when other problem-solving and disciplinary efforts have failed

Applications: Management is Everyone’s Business — For the Manager Control over the actions and outcomes in the workplace is a central management responsibility. Measurement is a key component of effective control. Managers go beyond measurement to take corrective action, which is part and parcel of an effective control system. As a manager, it is important to understand the control systems used in an organization as well as whether your own philosophy regarding control fits with the organization’s approach. © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

Applications: Management is Everyone’s Business — For Managing Teams Teams of workers often employ formal and process-focused control. Team roles and contributions to team efforts are often controlled with the culture and norms. Understanding how control mechanisms work is to the benefit of all of the team members. © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill

Applications: Management is Everyone’s Business — For Individuals Understanding control mechanisms can clarify why they are needed and how they contribute to the effectiveness of the organization. Many control techniques discussed in this chapter can be applied to one’s own work. © 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill