1. Foundations of Control
©Prentice Hall, 2001
Chapter 13

2. Learning Outcomes Define control Describe three approaches to control
Explain why control is important
Define the control process
Analyze the three types of control
©Prentice Hall, 2001
Chapter 13

3. Learning Outcomes Describe an effective control system
Identify contingency factors in the control process
Learn the dysfunctional side of controls
Describe how national differences affect the control process
Study ethical issues in employee monitoring
©Prentice Hall, 2001
Chapter 13

4. Three Approaches to Control Systems
Market
Control
Bureaucratic
Control
Clan
Control
Control is the process of monitoring activities to ensure that they are being accomplished as planned and of correcting any significant deviations. An effective system of controls ensures employees are performing the day-to-day activities that are required to obtain the goals of the organization. Control systems can be designed in three ways: market, bureaucratic, and clan controls. Market control emphasizes external market mechanisms: for example, price competition or market share. Bureaucratic control emphasizes authority and relies on administrative rules, regulations, procedures, and policies. Clan control regulates the behavior of employees through the shared values, norms, traditions, rituals, and beliefs of the organization’s culture. Most organizations do not rely on just one of the control systems. The key is to design a system of controls that helps the organization to effectively and efficiently reach its goals.
Without control, the final link in the functional chain of management, efficient planning, solid organizational structure, and motivated employees are no guarantee of success. However, the value of the control function lies predominantly in its relation to planning and delegating activities.
©Prentice Hall, 2001
Chapter 13

5. Managerial Decisions in the Control Process
Standard
Attained?
Do Nothing
Yes
Compare
Performance
to Standard No
Variance
Acceptable?
Do Nothing
Objectives
Yes
Measure
Performance No
Standard
Standard
Acceptable?
Identify
Causes
Yes
Control is the process of monitoring and correcting activities to ensure that they are being accomplished as planned. The control process consists of three steps: (1) measuring actual performance; (2) comparing actual performance against a standard; and (3) correcting deviations or inadequate standards.
The most common sources of information for performance measurement are personal observation, statistical reports, oral reports, and written reports. Personal observation provides first-hand knowledge of an activity, thereby permitting intensive coverage and allowing managers to “read between the lines.” Because it is subjective, however, personal observation may be biased. Also, it is time-consuming and obtrusive. Statistical reports consist of computer print-outs, graphs, bar charts, and numerical displays. Although they represent relationships clearly and accurately, statistical reports provide limited information about an activity and ignore qualitative elements. Oral reports consist of one-on-one conversations, telephone calls, and conferences. The advantages and disadvantages of oral reports are similar to those of personal observation. Written reports can also measure performance. They are more formal, comprehensive, and concise than oral reports. In addition, they are easy to catalog and reference. Comprehensive control efforts by management will require the use of all four of these methods. No
Revise
Standard
Correct
Performance
©Prentice Hall, 2001
Chapter 13

6. What Managers Measure Information People Finances Operations
Because employees will attempt to excel at those activities that are measured, what managers measure is probably more critical to the control process than how it is measured. Most control systems measure information, operations, finances, or people. Some control activities are generic: for example, measuring turnover or absenteeism and keeping costs within budgetary constraints. However, any comprehensive system of controls must recognize that managerial control activities are diverse. Marketing managers, for example, may measure market share and average dollar volume of sales. On the other hand, production managers may measure quantity of units produced per day or scrap per unit of output. Some activities, however, are difficult to quantify, such as the performance of a research chemist or elementary school teacher. Even so, managers must determine what value a person, department, or unit contributes to the organization and then convert the contribution into standards.
©Prentice Hall, 2001
Chapter 13

7. Defining an Acceptable Range of Variation
Upper Limit
Acceptable
Range of
Variation
Standard
Acceptable
Lower Limit
In the comparison step, managers determine the degree of discrepancy between actual performance and performance standards. Because some variation between performance outcomes and the standards is inevitable, management must determine an acceptable range of variation. Deviations in excess of this range are significant and warrant the attention of management. In the comparison stage, managers are particularly concerned with the size and direction of the variation. The example that is featured on the next slide should help make this clearer.
t t t t t t+5
©Prentice Hall, 2001
Chapter 13

8. Mid-Western Distributors’ Sales for July (in hundreds of cases)
Brand
Standard
Actual
Over (Under)
Heineken
Molson
Beck’s
Moosehead
Labatt’s
Corona
Amstel Light
Dos Equis
Tecate
Total Cases
1,075
630
800
620
540
160
225 80
170
4,300
913
634
912
622
672
140
220 65
286
4,464
(162) 4
112 2
132
(20)
(5)
(15)
116
164
Pat McFarlane is the sales manager for Mid-Western Distributors. The firm distributes imported beers in several states in the Midwest. Pat prepares a report during the first week of each month that describes sales for the previous month, classified by brand name. The table above displays both the standard and actual sales figures (in hundreds of cases) classified by brand name.
Should Pat be concerned about the July performance? Sales were a bit higher than he had originally targeted. Does that mean that there were no significant deviations? Even though overall performance was generally favorable, several brands might need the sales manager’s attention. The number of brands that deserve attention, however, depends on what Pat believes to be significant. How much variation should Pat allow before he takes corrective action?
The deviation on several brands (Molson, Moosehead, and Amstel Light) is small and not worthy of special attention. Are the shortages for Corona and Dos Equis significant? That’s a judgment call. Since Heineken sales were 15 percent below Pat’s goal, however, this brand needs attention. Pat should look for the cause. In this case, the loss can be attributed to aggressive advertising and promotion campaigns by Anheuser-Busch and Miller. Since Heineken is the number one-selling import, it is most vulnerable to the promotion clout of the big domestic producers. If the decline is more than a temporary slump, Pat will need to reduce his orders with the brewery and lower his inventory stock.
©Prentice Hall, 2001
Chapter 13

9. Taking Managerial Action
Do Nothing
Taking
Managerial
Action
Correct
Performance
Managers compare actual performance to a standard to determine the degree of variation. Some variation is normal, but management must determine the acceptable degree of variation.
Managers can take action in three ways: do nothing, take corrective action, or revise the standard. Because “doing nothing” is self-explanatory, this section discusses the other two options. Corrective action can include changing strategy, structure, compensation, and training; redesigning jobs; and replacing personnel. Immediate corrective action corrects problems at once and gets performance back on track. Basic corrective action determines how and why performance has deviated and corrects the problem at the source.
Rather than “putting out fires” with immediate corrective action, effective managers analyze deviations and, if justified, permanently correct significant variances between standard and actual performance. Before revising a standard downward, management must realize that if employees fall significantly short of reaching its target, their natural response will be to shift blame for the variance from themselves to the performance standards. If a manager believes that the standards are realistic, then he or she must explain the position, reaffirm the expectation that future performance will improve, and take appropriate corrective action.
Revise
the Standard
©Prentice Hall, 2001
Chapter 13

10. Three Types of Control Input Processes Output Feedforward Control
Anticipates
Problems
Concurrent
Control
Corrects Problems
as They Happen
Feedback
Control
Corrects Problems
after They Occur
Management can implement controls proactively (feedforward), during an activity (concurrent), or after the activity has been completed (feedback).
Feedforward control is the most desirable because it prevents anticipated problems. Thus, it is proactive. Unfortunately, this type of control requires timely, accurate information that is often difficult to obtain. As a result, managers often rely on concurrent and feedback control mechanisms.
Concurrent control occurs while an activity is in progress. The best known form is direct supervision. Even though there is some delay between the activity and the manager’s response, it is minimal.
Feedback control, the most commonly used type, occurs after the action. The major drawback is that by the time that the manager has the information, the damage has already been done. But, for many activities, feedback is the type of control that is workable. Compared to feedforward and concurrent control, feedback has two advantages. First, it helps managers to gauge the effectiveness of their planning efforts. Second, feedback can enhance employee motivation.
©Prentice Hall, 2001
Chapter 13

11. Qualities of an Effective Control System
Accuracy
Timeliness
Economy
Flexibility
Understandability
Effective control systems share certain common qualities, the importance of which varies with the situation. However, we can generalize that the following characteristics should make a control system effective.
1. Accuracy. An effective control system is reliable and produces valid data.
2. Timeliness. An effective control system provides timely information.
3. Economy. Managers should impose only the controls needed to produce the desired behavior.
4. Flexibility. Controls must be adjustable because times and conditions change.
5. Understandability. Employees will misunderstand or ignore a cryptic control system.
©Prentice Hall, 2001
Chapter 13

12. Qualities of an Effective Control System
Reasonable criteria
Emphasis on exceptions
Strategic placement
Multiple criteria
Corrective action
6. Reasonable criteria. Control standards must be reasonable and attainable. If they are unreasonable, the no longer motivate.
7. Strategic placement. Management should control the factors that are strategic to the organization.
8. Emphasis on the exception. Effective controls minimize the routine and pinpoint the exceptional.
9. Multiple criteria. Multiple performance measures expedite accurate performance assessments.
10. Corrective action. Effective controls identify the problem and specify the solution.
©Prentice Hall, 2001
Chapter 13

13. Contingency Factors in Control Systems
Contingency Variable
Control Recommendations
Small
Informal, personal management
Organization Size
Large
Formal, personal management
High
Many complex criteria
Position and Level
Low
Few, easy-to-measure criteria
High
Increased number of controls
Degree of Decentralization
Low
Reduced number of controls
The effectiveness of a given system of controls will be influenced by five situational factors. First, control systems should vary according to the size of the organization. Second, the higher one moves in the organization’s hierarchy, the greater the need for a multiple set of control criteria that are relevant to the unit’s goals. Third, the greater the degree of centralization, the more managers will need feedback on the performance of subordinate decision makers. Fourth, the organizational culture may promote trust, autonomy, and openness, or it may foster fear and reprisal. Fifth, the importance of an activity influences whether, and how, it will be controlled.
Open
Informal, self-control
Organizational Culture
Closed
Formal, external controls
High
Elaborate, comprehensive controls
Importance of an Activity
Low
Loose, informal controls
©Prentice Hall, 2001
Chapter 13

14. Adjusting Controls for National Differences
Distance
and the
Formality
of Controls
Technology
and the
Comparability
of Data
The differences in control systems of multinational corporations are primarily in the measurement and corrective action steps of the control process. Managers of foreign operations of multinational corporations, for instance, are not closely controlled by the head office. Furthermore, distance promotes formalized goals, and technological differences make control data incomparable. Organizations in technologically advanced nations use indirect control devices (computer-related reports and analyses) in addition to standardized rules and direct supervision. In countries that are less advanced, direct supervision and highly centralized decision making predominate.
©Prentice Hall, 2001
Chapter 13

15. Dysfunctional Controls
Inflexible
Controls
Unreasonable
Standards
When control standards are inflexible or unreasonable, employees may lose sight of the overall goals of the organization. Furthermore, the controls may run the organization instead of the organization running the controls. This situation could produce dysfunctional behavior.
For example, workers may concentrate on quantity to the detriment of quality if performance is evaluated on the basis of the number of units produced. Evidence indicates that the manipulation of control data is not a random phenomenon. When being measured on activities that make a difference in a person’s rewards, individuals often distort actual figures, emphasize successes, and suppress evidence of failures. Therefore, failure to design flexibility into a control system can create problems that are more severe than those the controls were intended to prevent.
©Prentice Hall, 2001
Chapter 13

16. Ethical Issues and Control
Questions of Privacy
Inform
Employees
Have a
Written Policy
Technological advances in computer hardware and software have made the process of controlling much easier. As a result, difficult questions have been raised about what managers have the right to know about employees and how far they can go in controlling employee behavior, both on the job and at home.
How can organizations benefit from the information provided by computer monitoring systems and yet minimize the behavioral and legal drawbacks? Experts suggest that organizations do the following:
Tell employees, both current and new, that they may be monitored.
Post a written employee-monitoring policy where employees will see it or distribute it to each employee. Have all employees acknowledge in writing that they have received a copy of the policy and that they understand it.
Monitor only those situations in which a legitimate business purpose is at stake: for instance, training or evaluating workers, or controlling costs. When used in this manner, computer monitoring can be an effective and ethical management control tool.
Monitor for
Business Reasons
©Prentice Hall, 2001
Chapter 13