1. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-0 Bateman Snell Management 5th Edition Competing in the New Era

2. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-1 Part Five Chapter 16 - Managerial Control Chapter Outline Bureaucratic Control Systems The Other Controls: Markets and Clans

3. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-2 Learning Objectives After studying Chapter 16, you will know: why companies develop control systems for employees how to design a basic bureaucratic control system the purpose for using budgets as a control device how to interpret financial ratios and other financial controls the procedures for implementing effective control systems the different ways that market control mechanisms are used by organizations how clan control can be approached in an empowered organization

4. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-3 Introduction Control process of measuring progress toward planned performance and applying corrective measures to ensure that performance is in line with managers’ objectives planning and controlling are interdependent effective planning facilitates control control facilitates planning three broad strategies for organizational control bureaucratic - use of rules, regulations, and formal authority market - use of pricing mechanisms to regulate activities clan - employees share organizational values and act in accordance with them

5. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-4 Blind optimism Setting a poor example An eye to the past Misplaced confidence Blame deflection Avoidance Leadership Symptoms Of An Out- Of-Control Company Isolation

6. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-5 Bureaucratic Control Systems The control cycle Step 1: Setting performance standards standard - expected performance for a given goal target that establishes a desired performance level, motivates performance, and serves as a benchmark against which actual performance is assessed can be set for any activity typically is derived from job requirements set with respect to quantity, quality, time, and cost Step 2: Measuring performance performance data obtained from three sources written reports personal observation oral reports

7. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-6 Bureaucratic Control Systems (cont.) The control cycle (cont.) Step 3: Comparing performance with the standard evaluation of the performance for some activities, small deviations from the standard are acceptable for other activities, a slight deviation may be serious principle of exception - control is enhanced by concentrating on the significant deviations from the standard only exceptional cases require corrective action Step 4: Taking corrective action ensures that operations are adjusted where necessary type of corrective action depends on the nature of the problem specialist control operator control

8. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-7 The Control Process Set performance standards Measure performance Compare Determine deviation Within limits Standards No Continue work progress Yes Take corrective action

9. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-8 Bureaucratic Control Systems (cont.) Approaches to bureaucratic control Feedforward (preliminary) control - control process used before operations begin future oriented prevent problems before they occur includes policies, procedures, and rules Concurrent control - control process used while plans are being carried out the heart of any control system includes directing, monitoring, and fine-tuning activities as they are performed advances in information technology have created powerful concurrent controls

10. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-9 Bureaucratic Control Systems (cont.) Approaches to bureaucratic control (cont.) Feedback control - control that focuses on the use of information about previous results to correct deviations from the acceptable standard implies that performance data were gathered and analyzed results used to make corrections timing is an important aspect of feedback control

11. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-10 Bureaucratic Control Systems (cont.) Management audits evaluation of the effectiveness and efficiency of various systems within an organization External audit - evaluation conducted by one organization, such as a CPA firm, on another may conduct external audit of a competitor for strategic decision-making purposes useful for feedback and feedforward control Internal audit - periodic assessment of a company’s own planning, organizing, leading, and controlling processes assess what the company has done for itself and its customers reviews the company’s past, present, and future

12. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-11 Bureaucratic Control System (cont.) Budgetary control most widely recognized and commonly used method of managerial control budgeting - process of investigating what is being done and comparing the results with the corresponding budget data used to verify accomplishments or remedy differences Fundamental budgetary considerations - begin with an estimate of sales and expected income budgeting information is supplied to the entire company or any of its units not confined to financial matters budgets prepared for a definite time period

13. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-12 Bureaucratic Control System (cont.) Budgetary control (cont.) Fundamental budgetary considerations (cont.) budgetary control proceeds through several stages establishing expectancies - starts with the broad company plan and sales estimates ends with budget approval and publication budgetary operations - find out what is being accomplished and compare the results with expectancies taking corrective action (if necessary)

14. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-13 Cost production (compare costs with sales price) Cash Sales Budget focuses on: Production (expressed in physical units) Master (all major business activities) Types Of Budgets

15. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-14 Bureaucratic Control System (cont.) Accounting audits procedures used to verify accounting reports and statements performed by an outside firm of public accountants Activity-based costing (ABC) cost accounting method that identifies streams of activity employees break down what they do to define basic activities total expenses computed by traditional accounting total amounts spread over the activities according to time spent on each provides an accurate picture of how costs should be charged highlights where wasted activities are occurring

16. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-15 How Dana Discovers What Its True Costs Are Salaries Fringes Supplies Fixed Costs Process sales orders$144,846 Source parts$136,320 Expedite supplier orders$ 72,143 Expedite internal processing$ 49,945 Receive supplier quality$ 47,599 Reissue purchase orders$ 45,235 Expedite customer orders$ 27,747 Schedule intracompany sales$ 17,768 Request engineering change$ 16,704 Resolve problems$ 16,648 Schedule parts$ 15,390 Total $590,345 New way Activity- based costing Salaries $371,917 Fringes $118,069 Supplies $76,745 Fixed costs $23,614 Total $590,345 Old way

17. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-16 Bureaucratic Control System (cont.) Financial controls Balance sheet - report that shows the financial picture of a company at a given time itemizes: assets - the values of various items the corporation owns liabilities - the amounts the corporation owes to various creditors stockholders’ equity - amount accruing the corporation’s owners shows trends over time gives managers insight into overall performance identifies areas which require adjustments Assets = Liabilities + Stockholders’ equity

18. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-17 Bureaucratic Control System (cont.) Financial controls (cont.) Profit and loss statement - itemized financial statement of the income and expenses of a company’s operations comparisons of profits and losses can identify trouble areas a common control for the enterprise as a whole may be used at the division and department level Financial ratios - indicate possible strengths and weaknesses calculated from selected items on the profit and loss statement and the balance sheet Liquidity ratios - indicate the ability to pay short-term debts current ratio - indicates the extent to which short-term assets can decline and still be adequate to pay short-term liabilities

19. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-18 Comparative P&L Statements For The Years Ending June 30 Income: Net sales$253,218 $257,636 $ 4,418 Dividends from investments 480 430 50 Other 1,741 1,773 32 Total 255,439 259,839 4,400 Deductions: Cost of goods sold 180,481 178,866 1,615 Selling and administrative expenses 39,218 34,019 5,199 Interest expense 2,483 2,604 121* Other 1,941 1,139 802 Total 224,123 216,628 7,495 Income before taxes 31,316 43,211 11,895* Provision for taxes 3,300 9,500 6,200* Net income $28,016 $33,711 $5,695* *Decrease

20. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-19 Bureaucratic Control System (cont.) Financial controls (cont.) Financial ratios (cont.) Leverage ratios - show the relative amount of funds in the business supplied by creditors and shareholders debt-equity ratio - indicates the company’s ability to meet its long- term financial obligations Profitability ratios - indicate management’s ability to generate a financial return on sales or investment return on investment (ROI) - ratio of profit to capital used rate of return from capital Using financial ratios - can have negative consequences management myopia - focus on short-term earnings and profits at the expense of longer-term strategic obligations

21. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-20 Bureaucratic Control System (cont.) Downside of bureaucratic control Rigid bureaucratic behavior - acting in ways that make one look good on the control system’s measures may result in rigid, inflexible behavior geared toward doing only what the system requires Tactical behavior - behavior aimed at “beating the system” manipulate or falsify performance data concern about individual rather than organizational performance Resistance to control - people don’t like being accountable control system can change expertise and power structures control system can change the social structure control system may be perceived as an invasion of privacy

22. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-21 Bureaucratic Control System (cont.) Designing effective control systems Establish valid performance standards - most effective standards expressed in quantitative terms measures are not easily faked or sabotaged system incorporates all important aspects of performance too many measures create overcontrol and employee resistance have stated tolerance ranges Provide adequate information - employees must understand the importance and nature of the control system people need feedback about performance enables them to correct deviations from the standards information should be accessible

23. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-22 Bureaucratic Control System (cont.) Designing effective control systems (cont.) Ensure acceptability to employees - more likely to accept systems that have useful performance standards overcontrol is not an issue believe the standards are possible to achieve emphasize positive behavior rather than focusing on controlling negative behavior alone standards are established participatively Use multiple approaches include both financial and nonfinancial performance goals incorporate aspects of feedforward, concurrent, and feedback control

24. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-23 The Other Controls: Markets And Clans Market control involves the use of economic forces and the pricing mechanisms that accompany them where output from any organizational unit has value to others, a price can be negotiated for its exchange as a market for these transactions becomes established: price becomes an indicator of the value of the product or service price competition effectively controls performance Market controls at the corporate level used to regulate independent business units business units treated as competing profit centers profit and loss data used to evaluate performance

25. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-24 The Other Controls: Markets And Clans (cont.) Market control Market controls at the business unit level regulates exchange among departments and functions transfer price - price charged by one unit in the organization for a product or service that it supplies to another unit of the same organization provide natural incentives to keep costs down Market controls at the individual level market rate is a good indicator of an employee’s potential worth provide a natural incentive for employees to enhance their skills boards of directors use market controls to manage CEOs incentives on top of base salary

26. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-25 Examples Of Market Control CEO uses market controls to evaluate performance of business unit heads Managers use transfer pricing to establish values for internal transactions among units Market rates determine the base wage/salary for managers and employees CEO/ President Business unit manager Business unit manager Business unit manager Business unit manager

27. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-26 The Other Controls: Markets And Clans (cont.) Clan control: the role of empowerment and culture bureaucratic and market controls are no longer sufficient because: employees’ jobs have changed the nature of management has changed the employment relationship has changed empowerment - has become a necessary aspect of a manager’s repertoire of control does not mean giving up control clan control - create relationships built on mutual respect encourage each individual to take responsibility for her/his job

28. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-27 Management Control In An Empowered Setting 1. Put control where the operation is 2. Use “real time” rather than after-the-fact controls 3. Rebuild the assumptions underlying management control to build on trust rather than distrust 4. Move to control based on peer norms 5. Rebuild the incentive systems to reinforce responsiveness and teamwork

29. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-28 The Other Controls: Markets And Clans (cont.) Clan control (cont.) Understanding culture’s role in control organization culture - set of important assumptions about the organization and its goals and practices that members of the company share strong culture - everyone understands and believes in the firms’ goals, priorities, and practices weak culture - different people hold different values confusion about corporate goals Diagnosing culture - clues about culture corporate mission statements and official goals business practices symbols, rites and ceremonies the stories people tell

30. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-29 Competing Values Model Of Culture Group Hierarchy Adhocracy Rational External Positioning Internal Maintenance Flexible Processes Control-Oriented Processes

31. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-30 The Other Controls: Markets And Clans (cont.) Clan control (cont.) Diagnosing culture (cont.) general cultures can be categorized Group Culture Dominant Attribute: cohesiveness, participation, teamwork, sense of family Leadership Style: mentor, facilitator, parent-figure Bonding: loyalty, tradition, interpersonal cohesion Strategic Emphasis: toward developing human resources, commitment, and morale

32. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-31 The Other Controls: Markets And Clans (cont.) Clan control (cont.) Diagnosing culture (cont.) Adhocracy Dominant Attribute: entrepreneurship, creativity, adaptability, dynamism Leadership Style: innovator, entrepreneur, risk taker Bonding: flexibility, risk, entrepreneur Strategic Emphasis: toward innovation, growth, new resources

33. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-32 The Other Controls: Markets And Clans (cont.) Clan control (cont.) Diagnosing culture (cont.) Hierarchy Dominant Attribute: order, rules and regulations, uniformity, efficiency Leadership Style: coordinator, organizer, administrator Bonding: rules, policies and procedures, clear expectations Strategic Emphasis: toward stability, predictability, smooth

34. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-33 The Other Controls: Markets And Clans (cont.) Clan control (cont.) Diagnosing culture (cont.) Rational Dominant Attribute: goal achievement, environment exchange, competitiveness Leadership Style: production and achievement-oriented, decisive Bonding: goal orientation, production, competition Strategic Emphasis: toward competitive advantage and market superiority

35. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 16-34 Clan control (cont.) Managing culture to reinforce clan control approaches to managing culture corporate leadership should espouse lofty ideals and visions for the company executives must be attentive to the details of daily affairs top management must behave appropriately during moments of truth when hard choices have to be made top management must celebrate and reward those who exemplify the new values clan control is a “double edged sword” takes a long time to develop and even longer to change employees must unlearn old values and embrace the new The Other Controls: Markets And Clans (cont.)