1. Chapter 16
Management Control

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.

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.

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

5. Control Approaches Model
Marketing Control
Outcomes
Subjective Control
Financial Controls
Focus
Operations Management
Bureaucratic Control
Process
Clan Control
Balanced Scorecard
Informal
Formal
Type

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

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.

8. The Bureaucratic Control Process
1. Establishing
Standards
2. Performance
Measurement
4. Corrective
Action
3. Identifying
Gaps

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

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

11. Types of Bureaucratic Control
Feedforward Control
Concurrent Control
Feedback Control

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

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

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

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

16. Types of Financial Controls
Budgetary Control
Financial Statements
Activity-Based
Costing
Financial Ratios

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

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

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

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

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