Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 2003 Chapter 7 Control

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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?

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © After discussing this section you should be able to: Learning Objectives Basics of Control 1.describe the basic control process 2.be able to answer the question: Is control necessary or possible?

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © The Control Process Compare actual to desired performance Establish clear standards Take corrective action, if needed Is a dynamic process Consists of three basic methods

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Setting Standards  Determine what should be benchmarked  Identify companies against which to benchmark standards  Collect data on other companies’ performance standards

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Cybernetic Control Process Actual Performance Measure Performance Compare with Standard Identify Deviations Desired Performance Implement Program for Corrections Develop Program for Corrections Analyze Deviations Adapted from Exhibit 7.1

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Is Control Necessary or Possible? What should be done if more control is necessary but not possible? Is more control necessary? Is more control possible?

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Is Control Necessary or Possible? Dependence sufficiently high? Expected resource flows unacceptable? Cybernetics feasible? Regulation cost acceptable? Goods fixed? Response: Regulate Dependence Restructure Dependence Reduce Dependence Do Nothing yes no Adapted from Exhibit 7.3 S.G. Green & M.A. Welsh, “Cybernetics and Dependence: Reframing the Control Concept, “ Academy of Management Review, 13 (1988):

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © After discussing this section you should be able to: Learning Objectives How and What to Control 3.discuss the various methods that managers can use to maintain control 4.describe the behaviors, processes, and outcomes that managers are choosing to control in today’s organizations

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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, Present

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Control Methods Bureaucratic Objective Normative Concertive Self-Control

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Concertive Controls  Employees are guided by the beliefs of work groups  Autonomous work groups  operate without managers  group members control processes, output, and behaviors

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Self-Control  Employees control their own behavior  Employees make decisions within well- established boundaries  Management and employees set goals and monitor their own progress

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © What to Control Balanced Scorecard Financial Perspective Customer Perspective Internal Business Perspective Innovation & Learning Perspective

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Example of a Balanced Scorecard Financial EVA Ratios and Budgets Innovation/Learning Waste minimization Time to market Customer Defections Partnerships Internal Business Quality Productivity

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Balanced Scorecard  Managers look beyond traditional financial measures  Managers set specific goals in each of four areas  Helps minimize the chances of suboptimization

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Basic Accounting Tools  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  Parts of a Basic Balance Sheet  Assets ªCurrent assets ªFixed assets  Liabilities ªCurrent liabilities ªLong-term liabilities  Owner’s equity ªStock ªAdditional paid in capital ªRetained earnings Adapted from Exhibit 7.6

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Common Financial Ratios Liquidity Ratios Current Ratio Quick Ratio Profitability Ratios Gross Profit Margin Return on Equity Leverage Ratios Debt to Equity Debt Coverage Efficiency Ratios Inventory Turnover Average Collections Period Adapted from Exhibit 7.7

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Common Kinds of Budgets Revenue Expense Profit Cash Capital Expenditure Variable

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Controlling Quality (Internal Business Perspective)  Internal perspective  Quality is usually measured three ways:  excellence  value  conformance to expectations

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © Four Levels of Waste Minimization Waste Disposal Waste Treatment Recycle & Reuse Waste Prevention & Reduction Adapted from Exhibit 7.14

Management, 2e by Chuck Williams South-Western/Thompson Learning Copyright © 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