1. Chapter 7
Control

2. Williams
What Would You Do?
Movie theaters have changed greatly in the last 20 years
Should Regal build its own megaplexes?
What resources would be needed for this expansion?
Would fast expansion threaten their business model?
How things have changed in this business! You can remember when every small town had a movie theater. And, when the weather warmed, usually between Memorial Day and Labor Day, the local drive-in movie theater would open. Most of those had 2 screens.
Today, however, you’ll be lucky to find a place that still has a downtown theater, as well as a drive-in. Most disappeared 15 years ago as theater chains like Carmike Cinemas bought them, shut them down, and then replaced them with brand new 4- and 6-screen theaters with large parking lots designed to handle the larger crowds that flocked to these new multi-screen theaters. As big as those changes were, they pale compared to what’s gone on in the last ten years, when movie theater companies built a record number of new theaters and movie screens. That record construction was prompted by key changes in theater seating and in upping the ante from 4- to 6- screen theaters to 25- to 30- screen “megaplexes.”
As the 14th largest movie theater company in the U.S., Regal Cinemas has had great success during this time, growing from zero to 349 movie screens in just 4 years. But as competitors build 25- to 30-screen megaplexes with plush stadium seating, does Regal need to consider building its own megaplexes in order to continue its growth? If you decide to follow the competition and build huge megaplex theaters, what key resources will you need to be successful? Finally, Regal Cinemas has always had a reputation for controlling costs and being well managed, would fast expansion and building of megaplex theaters weaken that part of the company?
If you were in charge at Regal Cinemas, what would you do?
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3. Learning Objectives Basics of Control
Williams
Learning Objectives Basics of Control
After discussing this section you should be able to:
describe the basic control process
be able to answer the question: Is control necessary or possible?
Control is a regulatory process of establishing standards that will achieve organizational goals, comparing actual performance to those standards, and then, if necessary, taking corrective action to restore performance to those standards.
Control is achieved when behavior and work procedures conform to standards, and company goals are accomplished
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4. The Control Process Establish clear standards
Williams
The Control Process
Establish clear standards
Compare actual to desired performance
Take corrective action, if needed
Is a dynamic process
Standards are a basis of comparison for measuring the extent to which organizational performance is satisfactory or unsatisfactory.
The next step in the control process is to compare actual performance to performance standards. While this sounds straightforward, the quality of the comparison largely depends on the measurement and information systems a company uses to keep track of performance. The better the system, the easier it is for companies to track their progress and identify problems that need to be fixed.
The next step in the control process is to identify performance deviations, analyze those deviations, and then develop and implement programs to correct them. This is similar to the planning process discussed in Chapter 4: Regular, frequent performance feedback allows workers and managers to track their performance and make adjustments in effort, direction, and strategies.
control is a continuous, dynamic process. It begins with actual performance and measures of that performance. Managers then compare performance to the pre-established standards.
There are three basic control methods: feedback control, concurrent control, and feedforward control, which are discussed on the slide linked to the action button.
Consists of three basic methods
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5. Setting Standards Determine what should be benchmarked
Williams
Setting Standards
Determine what should be benchmarked
Identify companies against which to benchmark standards
Collect data on other companies’ performance standards
The first step in setting standards is to determine what to benchmark. Companies can benchmark anything, from cycle time (how fast) to quality (how well). The next step is to identify the companies against which to benchmark your standards. Since this can require a significant commitment on the part of the benchmarked company, it can take time to identify and get agreement from them to be benchmarked. The last step is to collect data to determine other companies’ performance standards.
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6. Cybernetic Control Process
Williams
Cybernetic Control Process
Actual
Performance
Measure
Performance
Compare
with
Standard
Identify
Deviations
Desired
Performance
Implement
Program
for
Corrections
Develop
Program
for
Corrections
Analyze
Deviations
Source: H. Koontz & R.W. Bradspies, “Managing Through Feedforward Control: A Future Directed View,” Business Horizons, June 1972,
As shown in Figure 7.1, control is a continuous, dynamic process. It begins with actual performance and measures of that performance. Managers then compare performance to the pre-established standards. If they identify deviations from standard performance, they analyze the deviations and develop corrective programs. Then implementing the programs (hopefully) achieves the desired performance. To maintain performance levels at standard, managers must repeat the entire process again and again in an endless feedback loop. So control is not a one-time achievement or result. It continues over time (a dynamic process) and requires daily, weekly, and monthly attention from managers.
Adapted from Exhibit 7.1
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7. Basic Control Methods Feedback control Concurrent control
Williams
Basic Control Methods
Feedback control
gather information about performance deficiencies after they occur
Concurrent control
gather information about performance deficiencies as they occur
Feedforward control
gather information about performance deficiencies before they occur
Feedback control is a mechanism for gathering information about performance deficiencies after they occur. This information is then used to correct or prevent performance deficiencies. Study after study has clearly shown that feedback improves both individual and organizational performance. In most instances, any feedback is better than no feedback. However, if there is a downside to feedback, it is that it sometimes occurs too late. Sometimes it comes after big mistakes have been made.
Concurrent control is a mechanism for gathering information about performance deficiencies as they occur. Thus, it is an improvement over feedback, because it attempts to eliminate or shorten the delay between performance and feedback about the performance.
Feedforward control is a mechanism for gathering information about performance deficiencies before they occur. In contrast to feedback and concurrent control, which provide feedback on the basis of outcomes and results, feedforward control provides information about performance deficiencies by monitoring inputs, not outputs. Thus, feedforward seeks to prevent or minimize performance deficiencies before they occur.
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8. Is Control Necessary or Possible?
Williams
Is Control Necessary or Possible?
Is more control necessary?
Is more control possible?
Control is achieved when behavior and work procedures conform to standards, and goals are accomplished. By contrast, control loss occurs when behavior and work procedures do not conform to standards. Control loss usually prevents goal achievement.
What should be done
if more control is
necessary but not possible?
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9. Is More Control Necessary?
Williams
Is More Control Necessary?
Degree of dependence
the extent to which a company needs a particular resource to accomplish its goals
Resource flow
the extent to which a company has easy access to critical resources
Two factors can help managers determine whether more (or different) control is necessary: the degree of dependence and resource flows. Degree of dependence is the extent to which a company needs a particular resource to accomplish its goals. The more important a resource is for meeting organizational standards and goals, the more necessary it is to control that resource.
Note, however, that resources are more than just raw materials. A resource is anything that can be used to fulfill a need or solve a problem. Thus, resources can include employee skills, space, intellectual capability, capital ($), specialized know-how, a cohesive corporate culture, etc. Basically, critical resources, whatever form they take, make it easier for managers and employees to carry out the work processes that conform to standards and lead to goal accomplishment.
The second factor that determines whether more control is necessary is resource flow. Resource flow is the extent to which companies have easy access to critical resources. When companies have a difficult time getting the critical resources they need, they usually try to increase resource flows by creating or obtaining some form of control over them.
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10. Is More Control Possible?
Williams
Is More Control Possible?
Cost of control
direct costs of the control
unintended costs
Cybernetic feasibility
the extent to which it is possible to implement each step in the control process
if a step cannot be implemented, then control may not be possible
Degree of dependence and resource flows can help determine whether control is needed. However, the cost of control and cybernetic feasibility help determine whether control is possible. First, to determine whether more control is possible (or worthwhile), managers need to carefully assess the costs, benefits, and unintended consequences of control, because sometimes the costs of control exceed its benefits. An often-overlooked factor in determining the cost of control is the set of unintended consequences that sometimes accompany increased control. Control systems help companies, managers, and workers accomplish their goals, but at the same time that they help solve some problems, they can create others.
The second factor that helps managers determine whether control is possible is cybernetic feasibility. Cybernetic feasibility is the extent to which it is possible to implement each step in the control process: clear standards of performance, comparison of performance to standards, and corrective action. If one or more steps cannot be implemented, then maintaining effective control may be difficult or impossible.
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11. Quasi-Control: When Control Isn’t Possible
Williams
Quasi-Control: When Control Isn’t Possible
Reducing dependence
choose to abandon or change goals
when control over a critical resource is not possible
Restructure dependence
exchange dependence on one critical resource for dependence on another
If control is necessary, but not possible because of costs or cybernetic infeasibility, then managers can use two quasi-control options: reducing dependence or restructuring dependence. Reducing dependence involves an explicit choice to abandon or change organizational goals by reducing dependence on critical resources. Companies are likely to choose to reduce dependence under the same conditions that they would choose control. The difference, however, is that companies choose to reduce dependence when control is not possible, that is, when the cost is too high or cybernetic feasibility is near zero.
Instead of reducing dependence when control is not possible, companies can choose to restructure dependence—exchange dependence on one critical resource for dependence on another. There are three advantages to restructuring dependence. First, the new critical resource may be more controllable. Second, even better, the new critical resource may not require any control at all. Third, the company does not have to change its goals.
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12. Is Control Necessary or Possible?
Williams
Is Control Necessary or Possible?
Expected
resource
flows
unacceptable?
Regulation
cost
acceptable?
Dependence
sufficiently
high?
Goods
fixed?
Cybernetics
feasible?
Response:
yes
yes
yes
yes
Regulate
Dependence no no no
yes no
Restructure
Dependence
Exhibit 7.3 summarizes the questions that managers should answer to determine if control is necessary or possible. First, if the degree of dependence on a critical resource is high, or if resource flows are poor, managers will want to initiate greater control over critical resources. However, if resource flows and the degree of dependence are low, managers do not need to do anything to increase control. Next, if cybernetics (i.e., the basic control process) is feasible, managers should determine if the cost of control is acceptable. If it is, then managers should choose to regulate or control the degree of dependence on critical resources. However, if cybernetics is not feasible, the next step is deciding whether goals can be changed. If goals are fixed and unchangeable, then managers should restructure their dependence on critical resources by exchanging dependence on one critical resource for dependence on another. On the other hand, if goals can be changed, then managers should reduce dependence on critical resources by abandoning or changing key goals.
Do Nothing no
Reduce
Dependence
S.G. Green & M.A. Welsh, “Cybernetics and Dependence:
Reframing the Control Concept, “ Academy of Management
Review, 13 (1988):
Adapted from Exhibit 7.3
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13. Learning Objectives How and What to Control
Williams
Learning Objectives How and What to Control
After discussing this section you should be able to:
discuss the various methods that managers can use to maintain control
describe the behaviors, processes, and outcomes that managers are choosing to control in today’s organizations
What’s the biggest decision you’ve ever made? Was it choosing where to go to college? Was it choosing a major? Or was it a personal decision, such as deciding whether to get married, where to live, or which car or house to buy? Considering the lasting effect that decisions like these have on our lives, wouldn’t it be great if we could learn how to make them better? Managers struggle with decisions, too. They wring their hands over who to hire or promote, or when and how somebody should be fired. They fret about which suppliers the company should do business with. They lose sleep over who should get how much for pay raises or how to change the company strategy to respond to aggressive competitors. And, considering the lasting effect that these decisions have on themselves and their companies, managers also want to learn how to make better decisions.
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14. Williams
Blast From The Past From 1870 to the Present—Five Eras of Management Control
Industrial Betterment,
Scientific Management,
Human Relations,
Systems Rationalism,
Organizational Culture and Quality, 1980-Present
This slide represents the time-line of management control processes/systems. Note the systems have evolved from direct to indirect control of employees and organizations.
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15. Control Methods Bureaucratic Objective Normative Concertive
Self-Control

16. Bureaucratic Top-down control
Williams
Bureaucratic
Top-down control
Use rewards and punishment to influence employee behaviors
Use polices and rules to control employees
Often inefficient and resistant to change
Bureaucratic control is top-down control, in which managers try to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures.
Ironically, bureaucratic management and control were created to prevent just this type of managerial behavior. By encouraging managers to apply well-thought-out rules, policies, and procedures in an impartial, consistent manner to everyone in the organization, bureaucratic control is supposed to make companies more efficient, effective, and fair. Perversely, it frequently has just the opposite effect. Managers who use bureaucratic control often put following the rules above all else.
Another characteristic of bureaucratically controlled companies is that due to their rule- and policy-driven decision making, they are highly resistant to change and slow to respond to customers and competitors.
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17. Objective The use of observable measures Behavioral control
Williams
Objective
The use of observable measures
Behavioral control
regulate employee behaviors and actions
managers monitor and shape employee behaviors
Output control
measure employee outputs
focus is on outcomes not behaviors
In many companies, bureaucratic control has evolved into objective control, which is the use of observable measures of employee behavior or outputs to assess performance and influence behavior. Whereas bureaucratic control focuses on whether policies and rules are followed, objective control focuses on the observation or measurement of worker behavior or outputs. For example, measuring whether sales representatives filed expense reports within 30 days, as specified by company policy would be an example of bureaucratic control, while measuring whether they met their sales quotas, or returned phone calls in a timely manner would be examples of objective control. There are two kinds of objective control, behavior control and output control.
Behavior control is the regulation of the behaviors and actions that workers perform on the job. The basic assumption of behavior control is that if you do the right things (i.e., the right behaviors) every day, then those things should lead to goal achievement. However, behavior control is still management-based, which means that managers are responsible for monitoring, rewarding, and punishing workers for exhibiting desired or undesired behaviors.
Instead of measuring what managers and workers do, output control measures the results of their efforts. Whereas behavior control regulates, guides, and measures how workers behave on the job, output control gives managers and workers the freedom to behave as they see fit as long as it leads to the accomplishment of pre-specified, measurable results. Output control is often coupled with rewards and incentives. However, three things must occur for output control and rewards to lead to improved business results.
First, output control measures must be reliable, fair, and accurate. Second, employees and managers must believe that they can produce the desired results. Third, the rewards or incentives tied to outcome control measures must truly be dependent on achieving established standards of performance.
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18. Williams
Normative Control
Company values and beliefs guide employee behavior and decisions
Cultural norms not rules, guide employees
Created by:
careful selection of employees
role-modeling and retelling of stories
Rather than monitoring rules, behavior, or outputs, another way to control what goes on in organizations is to shape the beliefs and values of the people who work there through normative control. With normative controls, a company’s widely-shared values and beliefs guide workers’ behavior and decisions.
Normative controls are created in two ways. First, companies that use normative controls are very careful about whom they hire. While many companies screen potential applicants on the basis of their abilities, normatively controlled companies are just as likely to screen potential applicants based on their attitudes and values. Second, with normative controls, managers and employees learn what they should and should not do by observing experienced employees and by listening to the stories they tell about the company.
Stress the fact the organizations here stress indirect control of employees by establishing a strong culture.
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19. Concertive Controls Employees are guided by the beliefs of work groups
Williams
Concertive Controls
Employees are guided by the beliefs of work groups
Autonomous work groups
operate without managers
group members control processes, output, and behaviors
Whereas normative controls are based on the strongly-held, widely-shared beliefs throughout a company, concertive controls are based on beliefs that are shaped and negotiated by work groups. So while normative controls are driven by strong organizational cultures, concertive controls usually arise when companies give autonomous work groups complete responsibility for task completion. Autonomous work groups are groups that operate without managers and are completely responsible for controlling work group processes, outputs, and behavior. These groups do their own hiring, firing, worker discipline, work schedules, materials ordering, budget making and meeting, and decision making.
Concertive control is not established overnight. Autonomous work groups evolve through two phases as they develop concertive control. In phase one, autonomous work group members learn to work with each other, supervise each other’s work, and develop the values and beliefs that will guide and control their behavior. And because they develop these values and beliefs themselves, work group members feel strongly about following them. The second phase in the development of concertive control is the emergence and formalization of objective rules to guide and control behavior. The beliefs and values developed in phase one usually develop into more objective rules as new members join teams. The clearer those rules, the easier it becomes for new members to figure out how and how not to behave.
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20. Self-Control Employees control their own behavior
Williams
Self-Control
Employees control their own behavior
Employees make decisions within well-established boundaries
Management and employees set goals and monitor their own progress
Self-control, also known as self-management, is a control system in which managers and workers control their own behavior. However, self-control is not anarchy in which everyone gets to do whatever they want. In self-control or self-management, leaders and managers provide workers with clear boundaries within which they may guide and control their own goals and behaviors. Leaders and managers also contribute to self-control by teaching others the skills they need to maximize and monitor their own work effectiveness. In turn, individuals who manage and lead themselves establish self‑control by setting their own goals, monitoring their own progress, rewarding or punishing themselves for achieving or for not achieving their self-set goals, and constructing positive thought patterns that remind them of the importance of their goals and their ability to accomplish them.
One technique for reminding yourself of your goals is daily affirmation, in which you write down or speak your goals aloud to yourself several times a day. Skeptics contend that daily affirmations are nothing more than positive thinking. However, an affirmation is just a simple way to help control what you think about and how you spend your time. Basically, it’s a technique to prevent (i.e., control) yourself from getting sidetracked on unimportant thoughts and activities.
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21. What to Control Balanced Scorecard Financial Perspective
Williams
What to Control
Balanced Scorecard
Financial Perspective
Customer Perspective
Internal Business Perspective
Innovation & Learning Perspective
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22. Example of a Balanced Scorecard
Financial
EVA
Ratios and Budgets
Customer
Defections
Partnerships
Internal Business
Quality
Productivity
Innovation/Learning
Waste minimization
Time to market

23. Balanced Scorecard Managers look beyond traditional financial measures
Williams
Balanced Scorecard
Managers look beyond traditional financial measures
Managers set specific goals in each of four areas
Helps minimize the chances of suboptimization
The balanced scorecard encourages managers to look beyond traditional financial measures to four different perspectives on company performance. How do customers see us (the customer perspective)? What must we excel at (the internal perspective)? Can we continue to improve and create value (the innovation and learning perspective)? How do we look to shareholders (the financial perspective)?
The balanced scorecard has several advantages over traditional control processes that rely solely on financial measures. First, it forces managers at each level of the company to set specific goals and measure performance in each of the four areas. The second major advantage of the balanced scorecard approach to control is that it minimizes the chances of suboptimization, where, performance improves in one area, but only at the expense of decreased performance in others.
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24. Controlling Economic Value Added (Financial Perspective)
Williams
Controlling Economic Value Added (Financial Perspective)
The amount by which profits exceed the cost of capital in a given year
Important because:
shows if a profit center is paying for itself
focuses attention on specific departments
encourages creative ways to improve organizational performance
Conceptually, economic value added (EVA) is fairly easy for managers and workers to understand. It is the amount by which profits (after expenses) exceed the cost of capital in a given year. It is based on the simple idea that it takes capital to run a business, and capital comes at a cost. While most people think of capital as cash, capital is more likely to be found in a business in the form of computers, manufacturing plants, employees, raw materials, etc. And just like the interest that a homeowner pays on a mortgage or that a college student pays on a student loan, there is a cost to that capital.
The most common costs of capital are the interest paid on long-term bank loans used to buy all those resources, the interest paid to bondholders (who lend organizations their money), and the dividends (cash payments) and growth in stock value that accrue to shareholders. EVA is positive when company profits (revenues minus expenses minus taxes) exceed the cost of capital in a given year. In other words, if a business is to truly grow, its revenues must be large enough to cover both short-term costs (annual expenses and taxes) and long-term costs (the cost of borrowing capital from bondholders and shareholders).
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25. Basic Accounting Tools
Williams
Basic Accounting Tools
Parts of a Basic Balance Sheet
Assets
Current assets
Fixed assets
Liabilities
Current liabilities
Long-term liabilities
Owner’s equity
Stock
Additional paid in capital
Retained earnings
Basic Cash Flow Analysis Steps
Forecast sales
Project changes in anticipated cash flows
Project anticipated cash outflows
Project net cash flows by combining anticipated cash inflows and outflows
The traditional approach to controlling financial performance focuses on accounting tools such as cash flow analysis, balance sheets, income statements, financial ratios, and budgets. Cash flow analysis predicts how changes in a business will affect its ability to take in more cash than it pays out. Balance sheets provide a snapshot of a company’s financial position at a particular time (but not the future). Income statements, also called “profit and loss statements,” show what has happened to an organization’s income, expenses, and net profit (income less expenses) over a period of time. Exhibit 7.6 shows the basic steps or parts for cash flow analyses, balance sheets, and income statements. Financial ratios are typically used to track a business’s liquidity (cash), efficiency, and profitability over time compared to other businesses in its industry. Exhibit 7.7 lists a few of the most common financial ratios, and explains how they are calculated, what they mean, and when to use them. Finally, budgets are used to project costs and revenues, to prioritize and control spending, and to ensure that expenses don’t exceed available funds and revenues. Exhibit 7.8 reviews the different kinds of budgets managers can use to track and control company finances.
Adapted from Exhibit 7.6
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26. Basic Accounting Tools (cont’d)
Basic Income Statement
SALES REVENUE
- sales returns and allowances
+ other income
= NET REVENUE
- cost of goods sold
= GROSS PROFIT
- total operating expenses
= INCOME FROM OPERATIONS
- interest expense
= PRETAX INCOME
- income tax
= NET INCOME
Adapted from Exhibit 7.6

27. Common Financial Ratios
Liquidity Ratios
Current Ratio
Quick Ratio
Leverage Ratios
Debt to Equity
Debt Coverage
Efficiency Ratios
Inventory Turnover
Average Collections Period
Profitability Ratios
Gross Profit Margin
Return on Equity
Adapted from Exhibit 7.7

28. Common Kinds of Budgets
Williams
Common Kinds of Budgets
Revenue
Expense
Profit
Cash
Revenue Budgets – used to project or forecast future sales.
·        Accuracy of projection depends on economy, competitors, sales force estimates, etc.
·    Determined by estimating future sales volume and sales prices for all products and services.
 Expense Budgets – used within departments and divisions to determine how much will be spent on various supplies, projects, or activities.
·        One of the first places that companies look for cuts when trying to lower expenses.
 Profit Budgets – used by profit centers which have “profit and loss” responsibility.
·        Profit budgets combine revenue and expense budgets into one budget.
·        Typically used in large businesses with multiple plants and divisions.
 Cash Budgets – used to forecast how much cash a company will have on hand to meet expenses.
·        Similar to cash flow analyses. Used to identify cash shortfalls, which much be covered to pay bills, or cash excesses, which should be invested for a higher return.
Capital Expenditure Budgets – used to forecast large, long-lasting investments in equipment, buildings, and property.
·        Helps managers identify funding it will take to pay for future expansion or strategic moves designed to increase competitive advantage.
 Variable Budgets – used to project costs across varying levels of sales and revenues.
·        Important because it is difficult to accurately predict sales revenue and volume.
·        Leads to more accurate budgeting with respect to labor, materials, and administrative expenses, which vary with sales volume and revenues. Builds flexibility into the budgeting process.
Capital Expenditure
Variable
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29. Been There, Done That EVA at Armstrong World Industries
Williams
Been There, Done That EVA at Armstrong World Industries
It allows them to more closely align them with shareholders’ interests
Augments traditional measures
Reinforced with long-term incentives
This feature from the text reinforces how EVA forces managers to look at organizational performance in a completely different manner. The focus is more usable information and a long-term focus, which is reinforced via appropriate incentives.
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30. Controlling Customer Defections (Customer Perspective)
Williams
Controlling Customer Defections (Customer Perspective)
The rate by which customers are leaving the company
Don’t rely completely on customer satisfaction surveys
Easier to retain a customer, than get new ones
Rather than pouring over customer satisfaction surveys from current customers, studies indicate that companies may do a better job of answering the question “How do customers see us?” by closely monitoring customer defections, that is, by identifying which customers are leaving the company and measuring the rate at which they are leaving. In contrast to customer satisfaction surveys, customer defections and retention have a much greater effect on profits.
For example, very few managers realize that it costs five times as much to obtain a new customer as it does to keep a current one. In fact, the cost of replacing old customers with new ones is so great that most companies could double their profits by increasing the rate of customer retention by just 5-10 percent per year. Beyond the clear benefits to the bottom line, the second reason to study customer defections is that customers who have defected to other companies are much more likely than current customers to tell you what you are doing wrong. Finally, companies that understand why customers leave can not only take steps to fix ongoing problems, but can also identify which customers are likely to leave and make changes to prevent them from leaving.
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31. Controlling Quality (Internal Business Perspective)
Williams
Controlling Quality (Internal Business Perspective)
Internal perspective
Quality is usually measured three ways:
excellence
value
conformance to expectations
. So, in contrast to the financial perspective of EVA and the outward-looking customer perspective, the internal perspective asks the question “What must we excel at?” Quality is typically defined and measured in three ways: excellence, value, and conformance to expectations. When the company defines its quality goal as excellence, then managers must try to produce a product or service of unsurpassed performance and features.
Value is the customer perception that the product quality is excellent for the price offered. At a higher price, for example, customers may perceive the product to be less of a value. When a company emphasizes value as its quality goal, managers must simultaneously control excellence, price, durability, or other features of a product or service that customers strongly associate with value.
When a company defines its quality goal as conformance to specifications, employees must base decisions and actions on whether services and products measure up to standard specifications. In contrast to excellence and value-based definitions of quality that can be somewhat ambiguous, measuring whether products and services are “in spec” is relatively easy. Furthermore, while conformance to specifications is usually associated with manufacturing, it can be used equally well to control quality in nonmanufacturing jobs.
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32. Controlling Waste and Pollution (Innovation & Learning Perspective)
Williams
Controlling Waste and Pollution (Innovation & Learning Perspective)
Often an over-looked area
Three strategies for waste prevention and reduction
good housekeeping
material/product substitution
process modification
The last part of the balance scorecard, the innovation and learning perspective, addresses the question “Can we continue to improve and create value?”
There are three strategies for waste prevention and reduction.
Good housekeeping—regularly scheduled preventive maintenance for offices, plants, and equipment. Making sure to quickly fix leaky valves, or making sure machines are running properly so they don’t use more fuel than necessary are examples of good housekeeping. Material/product substitution—replacing toxic or hazardous materials with less harmful materials. For example, Maytag redesigned its dishwashers, substituting a molded polypropylene tub and door liner for the porcelain enamel steel tub it had used for years. Not only was the new material cheaper and lighter, but it also eliminated the paint residue and metal sludge that were by-products of the old porcelain enamel steel tub.
Process modification—changing steps or procedures to eliminate or reduce waste. For example, Coors found ways to make its beer bottles thinner. The results were annual savings of $2 million and a 38-million-pound reduction in the amount of glass used each year to bottle Coors beer.
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33. Four Levels of Waste Minimization
Williams
Four Levels of Waste Minimization
Waste
Prevention
& Reduction
Recycle & Reuse
Waste Treatment
Source: D.R. May & B.L. Flannery, “Cutting Waste with Employee Involvement Teams,” Business Horizons, September-October 1995,
The top level is waste prevention and reduction, in which the goals are to prevent waste and pollution before they occur, or to reduce them when they do occur.
The second level of the waste minimization is recycle and reuse. At this level, wastes are reduced by reusing materials as long as possible, or by collecting materials for on- or off-site recycling.
The third level of the waste minimization is waste treatment, where companies use biological, chemical, or other processes to turn potentially harmful waste into harmless compounds or useful by-products.
The fourth and last level of the waste minimization is waste disposal. Wastes that cannot be prevented, reduced, recycled, reused, or treated should be safely disposed of in environmentally secure landfills that prevent leakage and damage to soil and underground water supplies. Contrary to common belief, all businesses, not just manufacturing firms, have waste-disposal problems.
Waste Disposal
Adapted from Exhibit 7.14
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34. What Really Happened? Regal built 111 new theaters
Williams
What Really Happened?
Regal built 111 new theaters
Late to the megaplex market, competitors already had the best locations
Regal uses its information system to control costs, but that may not be enough
Losses and debt are mounting
Control is a process of establishing standards that will achieve organizational goals, comparing actual performance to those standards, and then, if necessary, taking corrective action to restore performance to those standards. The growth, profits, and positive reaction stemming from the first 25-screen megaplexes were so fantastic that Regal Cinema’s management couldn’t ignore the numbers. For example, even though the average cost was about $1 million per screen, or $25 million to $30 million per megaplex, the first few megaplexes generated huge sales and 30% returns. The problem for Regal So with sizable funds from private investing companies, KKR and Hicks Muse, it spent nearly $700 million over the next 3 years building 111 new theaters with 1,754 screens to catch up with its competitors. Given the quick move from 4- to 6-screen multiplex theaters to 24-screen megaplexes, Regal and its investors, KKR and Hicks Muse, figured that money was the most important resource that Regal needed to compete in this game. Accordingly, as mentioned above, KKR and Hicks Muse plowed nearly $700 million over 3 years into building Regal 111 new theaters with 1,754 screens. But what Regal, KKR, and Hicks Muse overlooked was that location was also a key resource. And by being the third or fourth large movie chain to build megaplexes in nearly each market, it typically bought and built new megaplexes in weak locations. The problem for Regal is that controlling costs, being well managed, and doing a good job of motivating managers and employees may not matter. If, because of poor locations, its theaters don’t have enough customers to generate the revenues they need to pay current bills (i.e., to cover operating costs), they’re surely not going to generate the money needed to pay off its long-term debt, which stands at $1.9 billion. In fact, Regal was losing so much money that is has had to close 14% of the theaters it was operating. One thing is clear, Regal and its investors, KKR and Hicks Muse seemed to have lost site of a key principle in the balanced scorecard, economic value added (EVA). EVA is more than just profits.
Chapter 7