1. Foundations of Control
PART V: Controlling 13
Chapter 13
Foundations of Control
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2. What Is Control? Control
The process of monitoring activities to ensure that they are being accomplished as planned and of correcting any significant deviations
An effective control system ensures that activities are completed in ways that lead to the attainment of the organization’s goals.
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.
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3. Steps in the Control Process
Measuring actual performance
Personal observation, statistical reports, oral reports, and written reports
Management by walking around (MBWA)
A phrase used to describe when a manager is out in the work area interacting with employees
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
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4. Steps in the Control Process (cont’d)
Comparing actual performance against a standard
Comparison to objective measures: budgets, standards, goals
Range of variation
The acceptable parameters of variance between actual performance and the standard
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.
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5. Steps in the Control Process (cont’d)
Taking managerial action to correct deviations or inadequate standards
Immediate corrective action
Correcting a problem at once to get performance back on track
Basic corrective action
Determining how and why performance has deviated and then correcting the source of deviation
Revising the standard
Adjusting the performance standard to reflect current and predicted future performance capabilities
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 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.
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6. Types Of Control Feedforward control Concurrent control
Control that prevents anticipated problems
Concurrent control
Control that takes place while an activity is in progress
Feedback control
Control that takes place after an action
Provides evidence of planning effectiveness
Provides motivational information to employees
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.
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7. The Qualities Of An Effective Control System
Accuracy
Timeliness
Economy
Flexibility
Understandability
Reasonable criteria
Strategic placement
Emphasis on the exception
Multiple criteria
Corrective action
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.
6. Reasonable criteria. Control standards must be reasonable and attainable. If they are unreasonable, they 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.
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8. What Contingency Factors Affect the Design of A Control System?
Size of the organization
The job/function’s position in the organization’s hierarchy
Degree of organizational decentralization
Type of organizational culture
Importance of the activity to the organization’s success
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.
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9. A Special Case of Control: Sarbanes-Oxley Act
A law establishing procedures for public companies to report their financial status.
The CEO and CFO must personally certify the organization’s financial reports.
The organization must have in place procedures and guidelines for audit committees.
CEOs and CFOs must reimburse the organization for bonuses and stock options when required by restatement of corporate profits.
Personal loans or lines of credit for executives are now prohibited.
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10. A Special Case of Control: Sarbanes-Oxley Act (cont’d)
Penalties for noncompliance:
Falsely stating corporate financials, can result in the executive being fined up to $1 million and imprisoned for up to 10 years.
If the executive’s action is determined to be willful, both the fine and the jail time can be doubled.
Reporting of corporate misdeeds
Establish an environment free from reprisals
Protection for employees who come forward (whistle-blowing) and report wrongdoing by executives.
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11. Controls And Cultural Differences
Methods of controlling employee behavior and operations can be quite different in different countries.
Distance creates a tendency for formalized controls in the form of extensive, formal reports.
In less technologically advanced countries, direct supervision and highly centralized decision making are the basic means of control.
Local laws constraint the corrective actions that managers can take foreign countries.
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.
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12. The Dysfunctional Side Of Control
Problems with unfocused controls
Failure to achieve desired or intended results occur when control measures lack specificity
Problems with incomplete control measures
Individuals or organizational units attempt to look good exclusively on control measures.
Problems with inflexible or unreasonable control standards
Controls and organizational goals will be ignored or manipulated.
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.
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13. Contemporary Issues In Control
The right to personal privacy in the workplace versus:
Employer’s monitoring of employee activities in the workplace
Employer’s liability for employees creating a hostile environment
Employer’s need to protect intellectual property
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 for business reasons.
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.
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14. Perspective on Employee Theft
Industrial security
The opportunity to steal presents itself through lax controls and favorable circumstances.
Criminologists
Employees steal to relieve themselves of financial-based or vice-based pressures.
Clinical psychologists
Employees steal because they can rationalize whatever they are doing as being correct and appropriate behavior.
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15. How An Entrepreneur Can Control For Growth
Planning for growth
By addressing growth strategies as part of business planning but not being overly rigid in planning.
Organizing for growth
The key challenges include finding capital, finding people, and strengthening the organizational culture.
Controlling for growth.
Maintaining good financial records and financial controls over cash flow, inventory, customer data, sales orders, receivables, payables, and costs.
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16. How Does the Entrepreneur Exit the Venture
Reasons for harvesting a venture
Cashing out of the investment in a venture
Exiting due to poor financial returns or organizational performance of the venture
A desire to pursue other ventures
Business valuation methods
Asset valuation
Earnings valuation
Cash flow valuation
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