Professor: Zvi Aronson, Ph.D. Foundation of Control Professor: Zvi Aronson, Ph.D.

What is the Control Process? The Control Process is a three-step process of measuring actual performance, comparing actual performance against a standard, and taking managerial action to correct deviations or to address inadequate standards Control is scalable.. It happens at the most detailed level (e.g., individual product defect) and gets aggregated to larger levels of analysis (department; business; company). It is critical for making decisions and for evaluating strategies. The control process is a three-step process of measuring actual performance, comparing actual performance against a standard, and taking managerial action to correct deviations or to address inadequate standards. (See Exhibit 13-2). The control process assumes that performance standards already exist, and they do. They’re the specific goals created during the planning process

Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-6

Control & The Strategic Management Process STEP 1: Identifying the organization’s current mission, goals and strategies STEP 2: Doing an external analysis STEP 3: Doing an internal analysis STEP 4: Formulating the strategies STEP 5: Implementing strategies STEP 6: Evaluating results Control & The Strategic Management Process Identify mission, goals and strategies SWOT External Analysis Internal Analysis Formulate Strategies The strategic management process (see Exhibit 4-2) is a six-step process that encompasses strategy planning, implementation, and evaluation. Although the first four steps describe the planning that must take place, implementation and evaluation are just as important! Even the best strategies can fail if management doesn’t implement or evaluate them properly. Implement Strategies Evaluate Results

Actual Performance To determine actual performance, a manager must first get information about it. Thus, the first step in control is measuring Four common sources of information frequently used to measure actual performance are: personal observation statistical reports oral reports written reports Four common sources of information frequently used to measure actual performance are personal observation, statistical reports, oral reports, and written reports. Each has particular strengths and weaknesses; however, use of a combination of them increases both the number of input sources and the probability of receiving reliable information

Evaluating Actual Performance Actual Performance must be compared against a standard. Standards come from goals and are often based on benchmarks. Benchmarks derive from a variety of sources like competitors and prior periods.

Corrective Action Corrective action is needed when there is a gap between actual performance and standards. Immediate Corrective Action Corrective action that addresses problems at once to get performance back on track Basic Corrective Action Corrective action that looks at how and why performance deviated before correcting the source of deviation Corrective action can mean steps to address performance problems (performance fell short of standards) OR adjusting standards (maybe goals were not realistic). Managers can choose among three possible courses of action: do nothing, correct the actual performance, or revise the standards. One decision that a manager must make is whether to take immediate corrective action, which corrects problems at once to get performance back on track, or to use basic corrective action, which looks at how and why performance deviated before correcting the source of deviation

Control is about Avoiding or Performance Problems Input Feedforward Control Anticipates problems Process Concurrent Control Corrects problems as they happen Output Feedback Control Corrections made after The most desirable type of control—feedforward control—prevents problems since it takes place before the actual activity. For instance, when McDonald’s opened its first restaurant in Moscow, it sent company quality control experts to help Russian farmers learn techniques for growing high-quality potatoes and to help bakers learn processes for baking high-quality breads. Concurrent control, as its name implies, takes place while a work activity is in progress. For instance, the director of business product management at Google and his team keep a watchful eye on one of Google’s most profitable businesses—online ads

What are Contemporary Control Issues? Employee Theft Any unauthorized taking of company property by employees for their personal use Workplace Violence According to the U.S. National Institute of Occupational Safety and Health, 2 million American workers per year are victims of some type of workplace violence Would you be surprised to find that up to 85 percent of all organizational theft and fraud is committed by employees, not outsiders? And, it’s a costly problem—estimated to be around $4,500 per worker per year Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-22

What is The Balanced Scorecard? A performance measurement tool that incorporates all performance areas a company wants to track and control. The balanced scorecard approach is a way to evaluate organizational performance from more than just the financial perspective. A balanced scorecard typically looks at four areas that contribute to a company’s performance: financial, customer, internal processes, and people/ innovation/growth assets Relies on developing strong metrics, financial and non-financial. These are often tracked on what is called a “dashboard”. Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-21

The Balanced Scorecard and Its Components http://www.youtube.com/watch?v=ZOJNgs-_83g

Tracking Financial Performance A critical form of control is tracking financial performance against financial goals. Traditional financial measures managers might use include ratio analysis budget analysis Managers collect and analyze performance and compare it against standards, which are benchmarks based on prior periods (e.g., last year) and to external benchmarks (e.g., competitors) Every business wants to earn a profit. To achieve this goal, managers need financial controls. For instance, they might analyze quarterly income statements for excessive expenses. They might calculate financial ratios to ensure that sufficient cash is available to pay ongoing expenses, that debt levels haven’t become too high, or that assets are being used productively Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-16

Financial Ratios by Type Liquidity ratios measure an organization’s ability to meet its current debt obligations Leverage ratios examine the organization’s use of debt to finance its assets and whether it’s able to meet the interest payments on the debt Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-17

Financial Ratios (cont.) Activity ratios assess how efficiently a company is using its assets. Profitability ratios measure how efficiently and effectively the company is using its assets to generate profit Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-18

Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 13-6 summarizes some of the most popular financial ratios that managers will analyze Copyright ©2011 Pearson Education, Inc. Publishing as Prentice Hall. 13-19