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Copyright ©2011 by Cengage Learning. All rights reserved 1 Chapter 16 Control Designed & Prepared by B-books, Ltd. MGMT3 Chuck Williams.

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Presentation on theme: "Copyright ©2011 by Cengage Learning. All rights reserved 1 Chapter 16 Control Designed & Prepared by B-books, Ltd. MGMT3 Chuck Williams."— Presentation transcript:

1 Copyright ©2011 by Cengage Learning. All rights reserved 1 Chapter 16 Control Designed & Prepared by B-books, Ltd. MGMT3 Chuck Williams

2 Copyright ©2011 by Cengage Learning. All rights reserved 2 Basics of Control After reading this section, you should be able to: 1.describe the basic control process.

3 Copyright ©2011 by Cengage Learning. All rights reserved 3 The Control Process Begins by establishing clear standards of performance Involves comparing actual performance to desired performance Takes corrective action to repair performance deficiencies Is a dynamic, cybernetic process Consists of feedback control, concurrent control, feedforward control But… control isn’t always worthwhile or possible 1 1

4 Copyright ©2011 by Cengage Learning. All rights reserved 4 Setting Standards 1.A good standard must enable goal achievement 2.Listening to customers or observing competitors 3.Benchmarking other companies –Determine what to benchmark. –Identify the companies against which to benchmark. –Collect data to determine other companies’ performance standards. 1.1

5 Copyright ©2011 by Cengage Learning. All rights reserved 5 Corrective Action Identify performance deviations Analyze those deviations Develop and implement programs to correct them Control Process Correct Identify Analyz e 1.3

6 Copyright ©2011 by Cengage Learning. All rights reserved 6 Dynamic, Cybernetic Process Develop & Implement Program for Corrective Action Set Standards Measure Performance Compare with Standards Compare with Standards Identify Deviations Analyze Deviations 1.4

7 Copyright ©2011 by Cengage Learning. All rights reserved 7 Feedback, Concurrent, and Feedforward Control Feedback Control Gather information about performance deficiencies after they occur Concurrent Control Gather information about performance deficiencies as they occur Feedforward Control Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur 1.5

8 Copyright ©2011 by Cengage Learning. All rights reserved 8 Feedforward Control Guidelines for Using Feedforward Control 1.Plan and analyze thoroughly. 2.Be discriminating as you select input variables. 3.Keep the feedforward system dynamic. Don’t let it become a matter of habit. 4.Develop a model of the control system. 5.Collect data on input variables regularly. 6.Assess data on input variables regularly. 7.Take action on what you learn. 1.Plan and analyze thoroughly. 2.Be discriminating as you select input variables. 3.Keep the feedforward system dynamic. Don’t let it become a matter of habit. 4.Develop a model of the control system. 5.Collect data on input variables regularly. 6.Assess data on input variables regularly. 7.Take action on what you learn. 1.5

9 Copyright ©2011 by Cengage Learning. All rights reserved 9 Control Loss Is control worthwhile? Maybe, maybe not. Managers must assess the regulation costs and the cybernetic feasibility.

10 Copyright ©2011 by Cengage Learning. All rights reserved 10 Control Methods After reading these sections, you should be able to: 2.discuss the various methods that managers can use to maintain control. 3.describe the behaviors, processes, and outcomes that today’s managers are choosing to control their organizations.

11 Copyright ©2011 by Cengage Learning. All rights reserved 11 Control Methods Normative Concertive Self-Control Bureaucratic Objective 2 2

12 Copyright ©2011 by Cengage Learning. All rights reserved 12 Bureaucratic Control Top-down control Use rewards and punishment to influence employee behaviors Use policies and rules to control employees Often inefficient and highly resistant to change 2.1

13 Copyright ©2011 by Cengage Learning. All rights reserved 13 Beyond the Book Adding Control from the Top When current CEO Paul Hanrahan first joined energy provider AES, an executive told him, “We don’t have procedures…use your common sense.” For years, the decentralized structure and entrepreneurial atmosphere helped drive AES to rapid growth and success. In 2002, however, a liquidity crisis involving short term debt and lax accounting standards almost sunk the company. While much of the freedom and experimentation remains, Hanrahan has added some structure as well. New finance, human resources, and business development divisions were established. And in 2008, AES’s accounting practices were finally brought into compliance with the Sarbanes-Oxley Act. Source: M. Gunther, “A Powerful Comeback”, Fortune, 26 October

14 Copyright ©2011 by Cengage Learning. All rights reserved 14 Objective Control Use of observable measures of worker behavior or outputs to assess performance and influence behavior Behavior Control Regulation of the behaviors and actions that workers perform on the job Output Control Regulation of workers’ results or outputs through rewards and incentives Regulation of workers’ results or outputs through rewards and incentives 2.2

15 Copyright ©2011 by Cengage Learning. All rights reserved 15 Effective Output Control 1.Output control measures must be reliable, fair, and accurate. 2.Employees and managers must believe that they can produce the desired results. 3.The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance. 2.2

16 Copyright ©2011 by Cengage Learning. All rights reserved 16 Normative Control Created by: –careful selection of employees –observing experienced employees & listening to stories about the company Normative Control 2.3

17 Copyright ©2011 by Cengage Learning. All rights reserved 17 Concertive Control Autonomous work groups –operate without managers –group members control processes, output, and behaviors Concertive Control Regulation of workers’ behavior and decisions through work group values and beliefs 2.4

18 Copyright ©2011 by Cengage Learning. All rights reserved 18 Self-Control Also known as self-management Employees control their own behavior Employees make decisions within well-established boundaries Managers teach others the skills they need to maximize work effectiveness Employees set goals and monitor their own progress 2.5

19 Copyright ©2011 by Cengage Learning. All rights reserved 19 What to Control? Customer Defections Customer Defections Quality Waste and Pollution Balanced Scorecard Budgets, Cash Flow, EVA Budgets, Cash Flow, EVA 3 3

20 Copyright ©2011 by Cengage Learning. All rights reserved 20 The Balanced Scorecard Customer Perspective Customer Perspective Internal Perspective Innovation and Learning Perspective Innovation and Learning Perspective Financial Perspective 3.1

21 Copyright ©2011 by Cengage Learning. All rights reserved 21 Advantages of the Balanced Scorecard 1.Forces managers to set goals and measure performance in each of the four areas 2.Minimizes the chances of suboptimization –performance improves in one area at the expense of others 3.1

22 Copyright ©2011 by Cengage Learning. All rights reserved 22 The Balanced Scorecard: Southwest Airlines 3.1 © Image100/Jupiterimages Sources: G. Anthes, “ROI Guide: Balanced Scorecard,” Computer World, 17 February 2003, available online at article.do?command=viewArticleBasic&articleId=78512&intsrc=article_pots_bot [accessed 5 September 2008].

23 Copyright ©2011 by Cengage Learning. All rights reserved 23 The Financial Perspective 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 Income statements Show what has happened to an organization’s income, expenses, and net profit over a period of time Financial ratios Used to track liquidity, efficiency, and profitability over time compared to other businesses in its industry 3.2

24 Copyright ©2011 by Cengage Learning. All rights reserved 24 Basic Accounting Tools 1.Forecast sales 2.Project changes in anticipated cash flows 3.Project anticipated cash outflows 4.Project net cash flows by combining anticipated cash inflows and outflows Steps for a Basic Cash Flow Analysis Beyond the Book

25 Copyright ©2011 by Cengage Learning. All rights reserved 25 Basic Accounting Tools 1.Assets Current assets Fixed assets 2.Liabilities Current liabilities Long-term liabilities 3.Owner’s equity Stock Additional paid in capital Retained earnings Parts of a Basic Balance Sheet Beyond the Book

26 Copyright ©2011 by Cengage Learning. All rights reserved 26 Basic Accounting Tools 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 Basic Income Statement Beyond the Book

27 Copyright ©2011 by Cengage Learning. All rights reserved 27 Financial Ratios LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LEVERAGE RATIOS Debt to Equity Debt Coverage LEVERAGE RATIOS Debt to Equity Debt Coverage EFFICIENCY RATIOS Inventory Turnover Average Collections Period EFFICIENCY RATIOS Inventory Turnover Average Collections Period PROFITABILITY RATIOS Gross Profit Margin Return on Equity PROFITABILITY RATIOS Gross Profit Margin Return on Equity Beyond the Book

28 Copyright ©2011 by Cengage Learning. All rights reserved 28 Common Kinds of Budgets Cash Budgets Used to forecast the cash a company will have for expenses Expense Budgets Used to determine spending on supplies, projects, or activities Profit Budgets Profit Budgets Used by profit centers, which have “profit and loss” responsibility Revenue Budgets Used to project or forecast future sales Variable Budgets Used to project costs across varying levels of sales/revenues Capital Expenditure Budgets Used to forecast large, long-lasting investments 3.2 Beyond the Book

29 Copyright ©2011 by Cengage Learning. All rights reserved 29 Economic Value Added (EVA) Economic Value Added The amount by which company profits exceed the cost of capital in a given year Common Costs of Capital  Long-term bank loans  Interest paid to bondholders  Dividends and growth in stock value that accrue to shareholders  Long-term bank loans  Interest paid to bondholders  Dividends and growth in stock value that accrue to shareholders 3.2

30 Copyright ©2011 by Cengage Learning. All rights reserved 30 Economic Value Added (EVA) 1. Calculate net operating profit after tax (NOPAT) 2. Identify how much capital the company has invested 3. Determine the cost paid for capital 4.Multiply capital used (step 2) times cost of capital (step 3) 5. Subtract total dollar cost of capital from net profit after taxes $3,500,000 $16,800,000 10% (10% x $16,800,000) = $1,680,000 $3,500,000 net profit -$1,680,000 cost of capital $1,820,000 EVA $3,500,000 net profit -$1,680,000 cost of capital $1,820,000 EVA 3.2

31 Copyright ©2011 by Cengage Learning. All rights reserved 31 Beyond the Book Big Results from Little Changes Small changes to a process can have significant results, especially in large companies like Home Depot. In trying to find new ways to cut back on expenses, Home Depot decided to change the brand of the coffee they served at their help desk for professional contractors (note: they didn’t eliminate the coffee entirely). They managed to save $500,000. Several $500,000 changes can really add up. Source: C. Tome, “C-Suite Strategies, The Colvin Interview: Renovating Home Depot”, interview by G. Colvin, Fortune, 31 August

32 Copyright ©2011 by Cengage Learning. All rights reserved 32 Why Is EVA Important? Shows whether a business, division, department, profit center, or product is paying for itself Makes managers at all levels pay closer attention to their segment of the business Encourages managers and workers to be creative in looking for ways to improve EVA performance 3.2

33 Copyright ©2011 by Cengage Learning. All rights reserved 33 Beyond the Book Cost-Cutting Guidelines Here are some guidelines for cost-cutting: 1.Instead of implementing one-off cost-cuts, examine the entire process involved in a job and ask how it can be made more efficient. 2.Try bartering with other companies. Exchange low margin cost products for things that you would normally pay cash for. 3.Offer to split the savings with employees. 4.Reducing expenses at the cost of quality can have adverse effects. 5.Leasing as opposed to buying equipment can reduce costs and have tax benefits. 6.Establish contract terms with your distributors that allow you to renegotiate prices annually. Source: T. Meyers, “frugal is back”, Entrepreneur, March

34 Copyright ©2011 by Cengage Learning. All rights reserved 34 The Customer Perspective Controlling Customer Defections Monitoring customer defections: –identify which customers are leaving the company –measuring the rate at which they are leaving Obtaining a new customer costs ten times as much as keeping a current one Customers who have left are likely to tell you what you are doing wrong Understanding why a customer leaves can help fix problems and make changes 3.3

35 Copyright ©2011 by Cengage Learning. All rights reserved 35 The Internal Perspective Controlling Quality Excellence Value Conformance to Expectations 3.4

36 Copyright ©2011 by Cengage Learning. All rights reserved 36 The Internal Perspective Controlling Quality 3.4

37 Copyright ©2011 by Cengage Learning. All rights reserved 37 Controlling Waste and Pollution Good housekeeping Material/product substitution Process modification 3.5

38 Copyright ©2011 by Cengage Learning. All rights reserved 38 Waste Disposal Waste Treatment Recycle & Reuse Waste Prevention & Reduction Controlling Waste and Pollution 3.5


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