1. PowerPoint slides by Susan A. Peterson, Scottsdale Community College PowerPoint slides by Susan A. Peterson, Scottsdale Community College Chapter 14: Control Chapter 14: Control m a n a g e m e n t 2e H i t t / B l a c k / P o r t e r

2. © 2008 Prentice-Hall Business Publishing 2 Learning Objectives After studying this chapter, you should be able to: Define control and explain its importance in organizations Describe the four basic elements of the control process and the issues involved in each Explain the concept of scope of control Compare and contrast strategic, tactical and operational controls. Identify the salient issues involved in each After studying this chapter, you should be able to: Define control and explain its importance in organizations Describe the four basic elements of the control process and the issues involved in each Explain the concept of scope of control Compare and contrast strategic, tactical and operational controls. Identify the salient issues involved in each

3. © 2008 Prentice-Hall Business Publishing 3 Learning Objectives Analyze the factors that determine the effectiveness of organizational controls

4. © 2008 Prentice-Hall Business Publishing 4 Control -Regulation of activities and behaviors within organizations -Adjustment or conformity to specifications or objectives Effective control depends heavily on planning, organizing, and leading Control -Regulation of activities and behaviors within organizations -Adjustment or conformity to specifications or objectives Effective control depends heavily on planning, organizing, and leading Control Function in Management

5. © 2008 Prentice-Hall Business Publishing 5 Ensures adjustment or conformity to specifications Ensures adjustment or conformity to specifications Regulates activities Regulates behavior Ensures adjustment or conformity to objectives Ensures adjustment or conformity to objectives Control Adapted from Exhibit 13.1 Control Function in Management

6. © 2008 Prentice-Hall Business Publishing 6 Control’s Feedback Loop Organizing Planning Control Feedback Changes in Adapted from Exhibit 13.2

7. © 2008 Prentice-Hall Business Publishing 7 Basic Elements in Control Process Control process includes four elements Each element involves managerial attention and decisions Control process includes four elements Each element involves managerial attention and decisions Establish Standards Measure Performance Compare Performance against Standards Compare Performance against Standards Evaluate Results and Take Action Evaluate Results and Take Action

8. © 2008 Prentice-Hall Business Publishing 8 Basic Elements in Control Process Standards = targets of performance Start at the top of the organization and involves every level of employee Involve employees in setting standards -Commits the employees to achieving the standards -Results in more appropriate standards Standards = targets of performance Start at the top of the organization and involves every level of employee Involve employees in setting standards -Commits the employees to achieving the standards -Results in more appropriate standards Establish Standards

9. © 2008 Prentice-Hall Business Publishing 9 Specificity of Standards and Performance Measurement High Low ConcreteAbstract Specificity of standards Level of confusion in performance measurement Adapted from Exhibit 13.4

10. © 2008 Prentice-Hall Business Publishing 10 Establishing Standards Standards How specific should they be? Who should set them? How difficult should they be to reach? Adapted from Exhibit 13.5

11. © 2008 Prentice-Hall Business Publishing 11 Basic Elements in Control Process Obtain consensus about how to assess performance If performance involves multiple activities, measurement must be comprehensive Measurement is costly, so usefulness of the information must justify the costs Obtain consensus about how to assess performance If performance involves multiple activities, measurement must be comprehensive Measurement is costly, so usefulness of the information must justify the costs Establish Standards Measure Performance

12. © 2008 Prentice-Hall Business Publishing 12 Issues in the Measurement of Performance Performance Measurement Can expensive, but non- critical, controls be eliminated? Are all necessary aspects of actions contributing to performance being measured? Is there consensus among those involved as to how performance will be measured? Can measurement criteria be quantified? Adapted from Exhibit 13.6

13. © 2008 Prentice-Hall Business Publishing 13 Basic Elements in Control Process Comparisons are affected by the kinds of measurements available Managers must interpret the patterns of comparisons (some negative/some positive) Comparisons often involve subjective and objective measures Comparisons are affected by the kinds of measurements available Managers must interpret the patterns of comparisons (some negative/some positive) Comparisons often involve subjective and objective measures Establish Standards Measure Performance Compare Performance against Standards Compare Performance against Standards

14. © 2008 Prentice-Hall Business Publishing 14 Basic Elements in Control Process Not all results require action -Evaluate importance and magnitude of the deviation Determine what action to take if necessary -Diagnosis skills of managers -Level of expertise -Evaluate the standards and the measures -Employees performing better than “standard” should be recognized and rewarded Not all results require action -Evaluate importance and magnitude of the deviation Determine what action to take if necessary -Diagnosis skills of managers -Level of expertise -Evaluate the standards and the measures -Employees performing better than “standard” should be recognized and rewarded Establish Standards Measure Performance Compare Performance against Standards Compare Performance against Standards Evaluate Results and Take Action Evaluate Results and Take Action

15. © 2008 Prentice-Hall Business Publishing 15 Outcomes of Performance Measurement Actual performance measured against standard for performance Gap Detected Gap Detected Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines) Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines) Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment) Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment) Actual performance better than expected performance + - Actual performance worse than expected performance Adapted from Exhibit 13.7

16. © 2008 Prentice-Hall Business Publishing 16 Types and Scope of Control Adapted from Exhibit 16.8: Types and Scope of Control Scope (Narrow)(Broad) Operational Controls Tactical Controls Strategic Controls Adapted from Exhibit 13.8

17. © 2008 Prentice-Hall Business Publishing 17 Strategic Controls Assess and regulate how the organization fits its external environment and meets its long- range objectives and goals Control becomes less efficient in uncertain or changing environments Assess and regulate how the organization fits its external environment and meets its long- range objectives and goals Control becomes less efficient in uncertain or changing environments

18. © 2008 Prentice-Hall Business Publishing 18 Centralization of Control and Environmental Stability Environmental stability Degree of centralization Decentralized Centralized StableTurbulent Adapted from Exhibit 13.9

19. © 2008 Prentice-Hall Business Publishing 19 Approaches to Strategic Control Strategic control system valuable but should not be tightly administered Strategic control system valuable but should not be tightly administered Strategic control system problematic Strategic control system problematic Strategic control system valuable Strategic control system valuable Strategic controls more for tracking progress than motivation Strategic controls more for tracking progress than motivation Ability to specify and measure precise strategic objectives Environmental turbulence EasyDifficult Low High Adapted from Exhibit 13.10

20. © 2008 Prentice-Hall Business Publishing 20 Tactical Controls Assess and regulate day-to- day functions of strategy implementation Financial controls Budgetary controls Supervisory structure controls Human resource controls Assess and regulate day-to- day functions of strategy implementation Financial controls Budgetary controls Supervisory structure controls Human resource controls

21. © 2008 Prentice-Hall Business Publishing 21 Strategic and Tactical Controls Tactical ControlsStrategic Controls Time Frame Objective Types of Comparisons Focus LimitedLong, unspecific Controls relate to specific, functional areas Controls relate to organization as a whole Comparisons made within organization Comparisons made to other organizations Implementation of strategy Determination of overall organizational strategy Adapted from Exhibit 13.11

22. © 2008 Prentice-Hall Business Publishing 22 Tactical Controls: Financial Controls Include quantitative ratios involving key financial statistics Common financial ratios -Profitability ratios (e.g., ROI) -Liquidity -Leverage -Efficiency or activity Other financial measurements -Break-even point Include quantitative ratios involving key financial statistics Common financial ratios -Profitability ratios (e.g., ROI) -Liquidity -Leverage -Efficiency or activity Other financial measurements -Break-even point

23. © 2008 Prentice-Hall Business Publishing 23 Examples of Financial Ratios RatioFormulaThe Gap 2006 In $ millions The Limited 2006 In $ millions PROFIT Return on Investment Net Profit Before Taxes Total Asset 1793 8821 0.20957 6346 0.15 LIQUIDITY Current Ratio Current Assets Current Liabilities 5239 1942 2.702784 1575 1.77 LEVERAGE Debt to Asset Total Debt Total Assets 3396 8821 0.0383875 6346 0.61 ACTIVITY Inventory Turnover Sales Inventory 16023 1696 9.459699 1160 8.36 Adapted from Exhibit 13.12

24. © 2008 Prentice-Hall Business Publishing 24 Budgetary Controls Compared to financial controls, budgetary controls: Cover a more limited time frame Focus on one financial objective Cannot be used to compare an organization to its competitors Compared to financial controls, budgetary controls: Cover a more limited time frame Focus on one financial objective Cannot be used to compare an organization to its competitors

25. © 2008 Prentice-Hall Business Publishing 25 Issues in Budgetary Control IssueQuestions Rolling budgets and revision Should the budget period be for 12 months followed by another 12-month budget a year later, or should a calendar quarter be added each time a new calendar quarter begins? Should the budget remain fixed for the budget period or should it be revised periodically during the period? Fixed or flexible budgets Should performance be evaluated against the original budget or against a budget that incorporates the actual activity level of the business? Adapted from Exhibit 13.13

26. © 2008 Prentice-Hall Business Publishing 26 Issues in Budgetary Control (cont.) IssueQuestions Bonuses based on budgets Should incentive compensation, if any, be based on actual versus budgeted performance, or on actual performance against some other standard? Evaluation criteria Should the budget used to evaluate performance include only those items over which the evaluated manager has control, or should it include all unit costs and revenues appropriate to the managerial unit? Tightness of the budget What degree of “stretch” should there be in the budget? Adapted from Exhibit 13.13

27. © 2008 Prentice-Hall Business Publishing 27 Supervisory Structure Controls Measure and evaluate: Reporting structure Span of control Other structural issues Measure and evaluate: Reporting structure Span of control Other structural issues

28. © 2008 Prentice-Hall Business Publishing 28 Training Control in the Human Resource Function Compensation Selection Human Resource Function Controls Appraisal and evaluation Appraisal and evaluation Adapted from Exhibit 13.14

29. © 2008 Prentice-Hall Business Publishing 29 Control in Bureaucracy and Clan Structures Type of Control Social Requirements Control ApproachInformational Requirements Bureaucracy  Norm of reciprocity  Legitimate authority Adherence to rules and regulations Formal and impersonal Emphasis on detecting deviance Imposed on the individual Rules ClanNorm of reciprocity Legitimate authority Shared values, beliefs Stresses group consensus on goals and their measurement Mutual assistance in meeting performance standards Uses deviations as guidelines in diagnosing problems Control comes from the individuals or groups Traditions Adapted from Exhibit 13.15

30. © 2008 Prentice-Hall Business Publishing 30 Operational Controls Regulate activities or methods an organization uses to produce goods and services for customers Used in evaluating: -Inputs -Transformation -Outputs Regulate activities or methods an organization uses to produce goods and services for customers Used in evaluating: -Inputs -Transformation -Outputs

31. © 2008 Prentice-Hall Business Publishing 31 Operational Controls Pre-control Controls the quality, quantity, and other characteristics of the inputs to the process Pre-control Controls the quality, quantity, and other characteristics of the inputs to the process Concurrent Control Evaluates the conversion process as it occurs Provides immediate feedback, which impacts worker motivation Concurrent Control Evaluates the conversion process as it occurs Provides immediate feedback, which impacts worker motivation Post-control Traditionally, quality control Many of these controls are being changed to pre- and concurrent controls Post-control Traditionally, quality control Many of these controls are being changed to pre- and concurrent controls Adapted from Exhibit 13.16

32. © 2008 Prentice-Hall Business Publishing 32 Control Effectiveness Control effectiveness depends on many factors: Focus of control Amount of control Quality of information Flexibility of controls Favorable cost-benefit ratio Source of control Control effectiveness depends on many factors: Focus of control Amount of control Quality of information Flexibility of controls Favorable cost-benefit ratio Source of control

33. © 2008 Prentice-Hall Business Publishing 33 Effectiveness of Controls KEY FACTORCONCERNS Focus of control What will be controlled? Where should controls be located in the organizational structure? Who is responsible for which controls? Amount of control Is there a balance between over- and under- control? Quality of information collected by controls Is the information useful? Is the information accurate? Is the information timely? Is the information objective? Adapted from Exhibit 13.17

34. © 2008 Prentice-Hall Business Publishing 34 Effectiveness of Controls (cont.) KEY FACTORCONCERNS Flexibility of controls Are the controls able to respond to varying conditions? Favorable cost-benefit ratios Is the information being gathered worth the cost of gathering it? Source of control Is control imposed by others? Is control decided by those who are affected? Adapted from Exhibit 13.17