16-1

Chapter Managerial Control 16 McGraw-Hill/Irwin Management, 7/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

16-3 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 purposes 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 in which market control mechanisms are used by organizations  How clan control can be approached in an empowered organization

16-4 Control  Control is essential for the attainment of any management objective  Control is any process that directs the activities of individuals toward the achievement of organizational goals

16-5 Characteristics of Control  Managers can apply three broad strategies for achieving organizational control  Bureaucratic control is the use of rules, regulations, and formal authority to guide performance  Market Control involves the use of pricing mechanisms to regulate activities in organizations as though they were economic transactions  Clan control I based on the idea that employees may share the values, expectations, and goals of the organization and act in accordance with them

16-6 Control Problems

16-7 Bureaucratic Control Systems: The Control Cycle  A typical bureaucratic control system has four major steps  Setting performance standards  Measuring performance  Comparing performance against the standard and determining deviations  Taking corrective action

16-8 The Control Cycle

16-9 Approaches to Bureaucratic Control  There are three approaches to bureaucratic control  Feed forward Control takes place before operations begin and includes policies, procedures, and rules designed to ensure that planned activities are carried out properly  Concurrent control takes place while plans are being carried out and includes directing, monitoring, and fine-tuning activities  Feedback control focuses on the use of information about results to correct deviations from the acceptable standard after they arise

16-10 Management Audits  Management audits are an evaluation of the effectiveness and efficiency of various systems within an organization  Management audits may be  External – this occurs when one organization evaluates another organization  Internal – these are a periodic assessment of a company’s own planning, organizing, leading, and controlling processes

16-11 Budgetary Controls  Budgetary control is the process of finding out what’s being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences  This is one of the most widely recognized and commonly used methods of managerial control  It is commonly called budgeting

16-12 Budgetary Control  Budgetary control begins with an estimate of sales and expected income  One of the primary considerations is the length of the budget period

16-13 Types of Budgets  Sales budget - Usually data for the sales budget are prepared by month, sales area, and product  Production budget - The production budget commonly is expressed in physical units  Cost budget - The cost budget is used for areas of the organization that incur expenses but no revenue, such as human resources and other support departments  Cash budget - The cash budget shows the anticipated receipts and expenditures, the amount of working capital available, the extent to which outside financing may be required, and the periods and amounts of cash available  Capital budget - The capital budget is used for the cost of fixed assets like plant and equipment  Master budget - The master budget includes all the major activities of the business

16-14 Financial Controls  Two financial statements that help control overall organizational performance are:  Balance sheet shows the financial picture of a company at a given time  Profit and loss statement is an itemized financial statement of the income and expenses of a company’s operations  Financial ratios are also an effective approach for checking on the overall performance of the enterprise

16-15 The Downside of Bureaucratic Control  A control system cannot be effective without consideration of how people will react to it  Three types of responses  Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of trouble by following the rules rather than doing the right thing  Tactical behavior leads to ineffective behavior because employees try to beat the system  Resistance to control occurs because  Control systems uncover mistakes, threaten job security and status, and decrease autonomy  Control systems can change expertise and power structures  Control systems can change the social structure of an organization  Control systems may be seen as an invasion of privacy

16-16 Designing Effective Control Systems  Effective control systems maximize potential benefits and minimize dysfunctional behaviors  Five characteristics of effective control systems  They are based on valid performance standards  They communicate adequate information to employees  They are acceptable to employees  They use multiple approaches  They recognized the relationship between empowerment and control

16-17 Market Control  Market controls involve the use of economic forces – and the pricing mechanisms that accompany them – to regulate performance  System is based on the principle that as output from an individual, department, or business unit creates value to other people, a price can be negotiated for its exchange  Two effects of this occur  Price becomes an indicator of the value of the product or service  Price competition has the effect of controlling productivity and performance

16-18 Market Controls

16-19 Market Controls  At the corporate level market controls are used to regulate independent business units  At the business unit level market controls are used to regulate exchanges among departments and functions  Transfer price is the price charged by one unit for a product or service provided to another unit within the organization

16-20 Market Controls  Market controls are used at the individual level to determine wage levels for the skills that employees possess

16-21 Clan Control: The Role of Empowerment and Culture  Managers are discovering that control systems based solely on bureaucratic and market mechanisms are insufficient for directing today’s workforce because  Employee’s jobs have changed  The nature of management has changed  The employment relationship has changed  Because of this empowerment has become a necessary aspect of a manager’s repertoire of control

16-22 Clan Control: The Role of Empowerment and Culture  Clan control involves creating relationships built on mutual respect and encouraging each individual to take responsibility for his or her actions  Employees work within a guiding framework of values, and they are expected to use good judgment  The emphasis in an empowered organization is on satisfying customers, not on pleasing the boss  Clan control takes a long time to develop and an even longer time to change

16-23 Clan Control: The Role of Empowerment and Culture

16-24 Looking Ahead  After Studying Chapter 17, You will know  The processes involved in the development of new technologies  How technologies proceed through a life cycle  How to manage technology for competitive advantage  How to assess technology needs  The key factors to consider when making decisions about technological innovation  The roles different people play in managing technology  How to develop an innovative organization  The key characteristics of successful development projects

16-25 Performance Standards  A standard is the level of expected performance for a given goals  Performance standards can be set with respect to  Quantity  Quality  Time used  Cost Return

16-26 Measuring Performance  Performance date is commonly obtained from three sources  Written reports, which include computer printouts  Oral reports  Personal observation  Information must be provided on a timely basis Return

16-27 Comparing Performance  For some activities relatively small deviations from the standard may be acceptable, in while in others a slight deviation would be serious  The principle of exception states that control is enhanced by concentrating on the exceptions, or significant deviations, from the standard Return

16-28 Taking Corrective Action  This step ensures that operations are adjusted where necessary to achieve the initially planned results  In computer-controlled production there are two basic types of control  Specialist control states that the operators of computer-numerical-control machines must notify engineering specialists for corrective action to be taken  Operator control states that multi-skilled operators can rectify their own problems as they occur Return

16-29 Balance Sheet  Te statement itemizes three elements of the organization  Assets are the values of the various items the corporation owns  Liabilities are the amounts a corporation owes to various creditors  Stockholders’ equity is the amount accruing to the corporation’s owners Return

16-30 Profit and Loss Statement  Comparative statements allow managers to view how income and expenses have changed over the last period Return

16-31 Financial Ratios  Liquidity ratios indicate a company’s ability to pay short-term debts  Current ratio – indicates the extent to which current assets can decline and still be adequate to pay current liabilities  Leverage ratios show the relative amount of funds in business supplied by creditors or shareholders  Debt to 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 and/or investments  Return on Investment (ROI) is a ratio of profit to capital used or a rate of return from capital Return