FOUNDATIONS OF MANAGEMENT Fall 2008

FOUNDATIONS OF MANAGEMENT Fall 2008
Reading Assignment Chapter Eight Unit Twelve Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

A regulatory process involving:
The Control Process The Process of assuring that actual outcomes conform to planned outcomes. A regulatory process involving: establishing standards comparing actual performance against the standards taking corrective action when necessary Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

UNIT 6 – Organization Design and Culture
BUAD 230 C, Fall 2008 The Control Process Begins with establishment of clear standards of performance Involves a comparison of 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 The control process begins when managers set goals. Companies then specify the performance standards that must be met to accomplish these goals. Standards are a basis of comparison for measuring the extent to which organizational performance is satisfactory or unsatisfactory. The next step in the control process is to compare actual performance to performance standards. While this sounds straightforward, the quality of the comparison largely depends on the measurement and information systems a company uses to keep track of performance. The better the system, the easier it is for companies to track their progress and identify problems that need to be fixed. The next step in the control process is to identify performance deviations, analyze those deviations, and then develop and implement programs to correct them. Control is a continuous, dynamic process. It begins with actual performance and measures of that performance. Managers then compare performance to the pre-established standards. There are three basic control methods: feedback control, concurrent control, and feedforward control, which are discussed on a subsequent slide. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Setting Standards Determine what should be benchmarked Identify companies against which to benchmark standards Collect data on other companies’ performance standards The first step in setting standards is to determine what to benchmark. Companies can benchmark anything, from cycle time (how fast) to quality (how well). The next step is to identify the companies against which to benchmark your standards. Since this can require a significant commitment on the part of the benchmarked company, it can take time to identify and get agreement from them to be benchmarked. The last step is to collect data to determine other companies’ performance standards. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Components of the Control Process
Objectives - Desired Outcomes Criteria - Specific Scales used to Assess Desired Outcomes Standards - Levels of Achievement on Criteria with Respect to Objective Measure - The Process Used to Determine the Actual Level Achieved on Desired Criteria Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Identify performance deviations Analyze those deviations
Corrective Action Identify performance deviations Analyze those deviations Develop and implement programs to correct them Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Steps in the Control Process
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Steps in the Control Process 4. Take corrective action Feedback Adjust performance If Inadequate Establish Strategic Goals 1. Establish standards of performance 2. Measure actual performance 3. Compare performance to standards If Adequate Feedback 4. Do nothing or provide reinforcement Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College 10

BUAD 230 C, Fall 2008 Approaches to Control Feedback Control Gather information about Performance deficiencies after they occur Concurrent Control Performance deficiencies as Feedforward Control Monitor performance inputs rather than outputs to prevent or Minimize performance deficiencies before they occur Feedback control is a mechanism for gathering information about performance deficiencies after they occur. This information is then used to correct or prevent performance deficiencies. Study after study has clearly shown that feedback improves both individual and organizational performance. In most instances, any feedback is better than no feedback. However, if there is a downside to feedback, it is that it sometimes occurs too late. Sometimes it comes after big mistakes have been made. Concurrent control is a mechanism for gathering information about performance deficiencies as they occur. Thus, it is an improvement over feedback, because it attempts to eliminate or shorten the delay between performance and feedback about the performance. Feedforward control is a mechanism for gathering information about performance deficiencies before they occur. In contrast to feedback and concurrent control, which provide feedback on the basis of outcomes and results, feedforward control provides information about performance deficiencies by monitoring inputs, not outputs. Thus, feedforward seeks to prevent or minimize performance deficiencies before they occur. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Concurrent Control Outputs Inputs Concurrent Control Focuses on quality of task activities to Transform inputs into outputs Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College 13

BUAD 230 C, Fall 2008 Feedforward Control Feedforward Control Focuses on quality of resources acquired by organization Outputs Production Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College 12

BUAD 230 C, Fall 2008 Feedforward Control Guidelines for Using Feedforward Control Thorough planning and analysis are required. Careful discrimination must be applied in selecting input variables. The feedforward system must be kept dynamic. A model of the control system should be developed. Data on input variables must be regularly collected. Data on input variables must be regularly assessed. Feedforward control requires action. Exhibit 6.2 lists guidelines that companies can follow to get the most out of feedforward control. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Four Steps in Organizational Control
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Four Steps in Organizational Control Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 The Control Process Establish standards, goals, or targets against which performance is to be evaluated Standards must be consistent with the organization’s strategy Managers at each organizational level need to set their own standards. Standards must be consistent with the organization’s strategy (i.e., for a low cost strategy, standards should be focused closely on reducing costs). Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 The Control Process Measure actual performance Managers can measure outputs resulting from worker behavior or they can measure the behavior themselves. The more non-routine the task, the harder it is to measure performance or output, causing managers to measure an employee’s behavior (e.g., that an employee comes to work on time) rather than the employee’s output. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 The Control Process Compare actual performance against chosen standards Managers must decide if performance actually deviates, often, several problems combine creating low performance Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 The Control Process Evaluate the result and initiate corrective action if the situation is not being achieved Standards have been set too high or too low. Workers may need additional training or equipment. This step is often hard since the environment is constantly changing. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Three Organizational Control Systems
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Three Organizational Control Systems Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College Figure 8.3

Financial Measures of Performance
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Financial Measures of Performance Profit ratios Measures of how efficiently managers convert resources into profits. return on investment (ROI). Liquidity ratios Measures of how well managers protect resources to meet short term debt—current and quick ratios. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Financial Measures of Performance
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Financial Measures of Performance Leverage ratios Measures of how much debt is used to finance operations—debt-to-asset and times-covered ratios. Activity ratios Measures of how efficiently managers are creating value from assets—inventory turnover, days sales outstanding ratios. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Organizational Goals Organizational Goals Each division within the firm is given specific goals that must be met in order to attain overall organizational goals. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Organizational Goals Goals should be specific and difficult, but not impossible, to achieve (stretch goals). Goal setting and establishing output controls are management skills that are developed over time. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Organization-Wide Goal Setting
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Organization-Wide Goal Setting Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Operating Budgets Operating Budget A blueprint that states how managers intend to allocate and use the resources they control to attain organizational goals effectively and efficiently Each division is evaluated on its own budgets for cost, revenue or profit Managers are evaluated by how well they meet goals for controlling costs, generating revenues, or maximizing profits while staying within their budgets. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Operating Budgets Three components are the essence of effective output control Objective financial measures Challenging goals and performance standards Appropriate operating budgets Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Problems with Output Control
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Problems with Output Control Managers must create output standards that motivate at all levels. Standards should not cause managers to behave in inappropriate ways to achieve organizational goals. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Control Methods Normative Concertive Self-Control Bureaucratic Objective Managers can use five different methods to achieve control in their organizations: bureaucratic, objective, normative, concertive, and self-control. These methods are discussed on the next slides. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Bureaucratic Control Top-down control Use rewards and punishment to influence employee behaviors Use policies and rules to control employees Often inefficient and resistant to change Bureaucratic control is top-down control, in which managers try to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures. Ironically, bureaucratic management and control were created to prevent just this type of managerial behavior. By encouraging managers to apply well-thought-out rules, policies, and procedures in an impartial, consistent manner to everyone in the organization, bureaucratic control is supposed to make companies more efficient, effective, and fair. Perversely, it frequently has just the opposite effect. Managers who use bureaucratic control often put following the rules above all else. Another characteristic of bureaucratically controlled companies is that due to their rule- and policy-driven decision making, they are highly resistant to change and slow to respond to customers and competitors. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Objective Control 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 In many companies, bureaucratic control has evolved into objective control, which is the use of observable measures of employee behavior or outputs to assess performance and influence behavior. Whereas bureaucratic control focuses on whether policies and rules are followed, objective control focuses on the observation or measurement of worker behavior or outputs. For example, measuring whether sales representatives filed expense reports within 30 days, as specified by company policy would be an example of bureaucratic control, while measuring whether they met their sales quotas, or returned phone calls in a timely manner would be examples of objective control. There are two kinds of objective control, behavior control and output control. Behavior control is the regulation of the behaviors and actions that workers perform on the job. The basic assumption of behavior control is that if you do the right things (i.e., the right behaviors) every day, then those things should lead to goal achievement. However, behavior control is still management-based, which means that managers are responsible for monitoring, rewarding, and punishing workers for exhibiting desired or undesired behaviors. Instead of measuring what managers and workers do, output control measures the results of their efforts. Whereas behavior control regulates, guides, and measures how workers behave on the job, output control gives managers and workers the freedom to behave as they see fit as long as it leads to the accomplishment of pre-specified, measurable results. Output control is often coupled with rewards and incentives. However, three things must occur for output control and rewards to lead to improved business results. First, output control measures must be reliable, fair, and accurate. Second, employees and managers must believe that they can produce the desired results. Third, the rewards or incentives tied to outcome control measures must truly be dependent on achieving established standards of performance. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 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 Rather than monitoring rules, behavior, or outputs, another way to control what goes on in organizations is to shape the beliefs and values of the people who work there through normative control. With normative controls, a company’s widely-shared values and beliefs guide workers’ behavior and decisions. Normative controls are created in two ways. First, companies that use normative controls are very careful about whom they hire. While many companies screen potential applicants on the basis of their abilities, normatively controlled companies are just as likely to screen potential applicants based on their attitudes and values. Second, with normative controls, managers and employees learn what they should and should not do by observing experienced employees and by listening to the stories they tell about the company. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 Concertive Control Employees are guided by the beliefs that are shaped and negotiated by work groups Autonomous work groups operate without managers group members control processes, output, and behaviors Whereas normative controls are based on the strongly-held, widely-shared beliefs throughout a company, concertive controls are based on beliefs that are shaped and negotiated by work groups. So while normative controls are driven by strong organizational cultures, concertive controls usually arise when companies give autonomous work groups complete responsibility for task completion. Autonomous work groups are groups that operate without managers and are completely responsible for controlling work group processes, outputs, and behavior. These groups do their own hiring, firing, worker discipline, work schedules, materials ordering, budget making and meeting, and decision making. Concertive control is not established overnight. Autonomous work groups evolve through two phases as they develop concertive control. In phase one, autonomous work group members learn to work with each other, supervise each other’s work, and develop the values and beliefs that will guide and control their behavior. And because they develop these values and beliefs themselves, work group members feel strongly about following them. The second phase in the development of concertive control is the emergence and formalization of objective rules to guide and control behavior. The beliefs and values developed in phase one usually develop into more objective rules as new members join teams. The clearer those rules, the easier it becomes for new members to figure out how and how not to behave. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 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 After reviewing this last slide on control methods, link to the video (teaching notes below). Self-control, also known as self-management, is a control system in which managers and workers control their own behavior. However, self-control is not anarchy in which everyone gets to do whatever they want. In self-control or self-management, leaders and managers provide workers with clear boundaries within which they may guide and control their own goals and behaviors. Leaders and managers also contribute to self-control by teaching others the skills they need to maximize and monitor their own work effectiveness. In turn, individuals who manage and lead themselves establish self‑control by setting their own goals, monitoring their own progress, rewarding or punishing themselves for achieving or for not achieving their self-set goals, and constructing positive thought patterns that remind them of the importance of their goals and their ability to accomplish them. One technique for reminding yourself of your goals is daily affirmation, in which you write down or speak your goals aloud to yourself several times a day. Skeptics contend that daily affirmations are nothing more than positive thinking. However, an affirmation is just a simple way to help control what you think about and how you spend your time. Basically, it’s a technique to prevent (i.e., control) yourself from getting sidetracked on unimportant thoughts and activities. Click on the movie camera icon to link to the Biz Flix video of Scent of a Woman. Then, discuss the following text questions with your students: 1.What pattern of control do these scenes show? What are the control system’s elements? Do these scenes show a periodic or a continuous type of performance measurement? Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

BUAD 230 C, Fall 2008 What to Control? The Balanced Scorecard looks at company performance through four perspectives: Customer Perspective Internal Perspective Innovation and Learning Perspective Financial Perspective The balanced scorecard encourages managers to look beyond traditional financial measures to four different perspectives on company performance. How do customers see us (the customer perspective)? What must we excel at (the internal perspective)? Can we continue to improve and create value (the innovation and learning perspective)? How do we look to shareholders (the financial perspective)? The balanced scorecard has several advantages over traditional control processes that rely solely on financial measures. First, it forces managers at each level of the company to set specific goals and measure performance in each of the four areas. The second major advantage of the balanced scorecard approach to control is that it minimizes the chances of suboptimization, where, performance improves in one area, but only at the expense of decreased performance in others. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Advantages of the Balanced Scorecard
Forces managers to set goals and measure performance in each of the four areas Minimizes the chances of suboptimization performance improves in one area, but at the expense of others Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Economic Value Added (EVA)
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 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 Conceptually economic value added (EVA) is more than just profits. It is the amount by which profits exceed the cost of capital in a given year. It is based on the idea that it takes capital to run a business and that capital comes from a cost. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

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 Does not specify what should or should not be done to improve performance Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

The Customer Perspective
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 The Customer Perspective Monitoring customer defections: identify which customers are leaving the company measuring the rate at which they are leaving Obtaining a new customer costs five 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 Rather than pouring over customer satisfaction surveys from current customers, studies indicate that companies may do a better job of answering the question “How do customers see us?” by closely monitoring customer defections, that is, by identifying which customers are leaving the company and measuring the rate at which they are leaving. In contrast to customer satisfaction surveys, customer defections and retention have a much greater effect on profits. For example, very few managers realize that it costs five times as much to obtain a new customer as it does to keep a current one. In fact, the cost of replacing old customers with new ones is so great that most companies could double their profits by increasing the rate of customer retention by just 5-10 percent per year. Beyond the clear benefits to the bottom line, the second reason to study customer defections is that customers who have defected to other companies are much more likely than current customers to tell you what you are doing wrong. Finally, companies that understand why customers leave can not only take steps to fix ongoing problems, but can also identify which customers are likely to leave and make changes to prevent them from leaving. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Internal Control - Controlling Quality
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Internal Control - Controlling Quality Excellence Measuring Quality Value In contrast to the financial perspective of EVA and the outward-looking customer perspective, the internal perspective asks the question “At what must we excel?” Quality is typically defined and measured in three ways: excellence, value, and conformance to expectations. When the company defines its quality goal as excellence, then managers must try to produce a product or service of unsurpassed performance and features. Value is the customer perception that the product quality is excellent for the price offered. At a higher price, for example, customers may perceive the product to be less of a value. When a company emphasizes value as its quality goal, managers must simultaneously control excellence, price, durability, or other features of a product or service that customers strongly associate with value. When a company defines its quality goal as conformance to specifications, employees must base decisions and actions on whether services and products measure up to standard specifications. In contrast to excellence and value-based definitions of quality that can be somewhat ambiguous, measuring whether products and services are “in spec” is relatively easy. Furthermore, while conformance to specifications is usually associated with manufacturing, it can be used equally well to control quality in nonmanufacturing jobs. Conformance to Expectations Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

The Innovation & Learning Perspective
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 The Innovation & Learning Perspective Controlling Waste and Pollution Waste Disposal Waste Treatment Recycle & Reuse Waste Prevention & Reduction Source: D.R. May & B.L. Flannery, “Cutting Waste with Employee Involvement Teams,” Business Horizons, September-October 1995, The top level is waste prevention and reduction, in which the goals are to prevent waste and pollution before they occur, or to reduce them when they do occur. The second level of the waste minimization is recycle and reuse. At this level, wastes are reduced by reusing materials as long as possible, or by collecting materials for on- or off-site recycling. The third level of the waste minimization is waste treatment, where companies use biological, chemical, or other processes to turn potentially harmful waste into harmless compounds or useful by-products. The fourth and last level of the waste minimization is waste disposal. Wastes that cannot be prevented, reduced, recycled, reused, or treated should be safely disposed of in environmentally secure landfills that prevent leakage and damage to soil and underground water supplies. Contrary to common belief, all businesses, not just manufacturing firms, have waste-disposal problems. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

Strategies to Prevent & Reduce Waste
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 Strategies to Prevent & Reduce Waste Good housekeeping Material/product substitution Process modification The last part of the balance scorecard, the innovation and learning perspective, addresses the question “Can we continue to improve and create value?” There are three strategies for waste prevention and reduction. Good housekeeping—regularly scheduled preventive maintenance for offices, plants, and equipment. Making sure to quickly fix leaky valves, or making sure machines are running properly so they don’t use more fuel than necessary are examples of good housekeeping. Material/product substitution—replacing toxic or hazardous materials with less harmful materials. For example, 3M eliminated 800,000 tons of hazardous waste by using benign substitutes for toxic solvents in its manufacturing processes. In the first year, 3M has saved $827 million. Process modification—changing steps or procedures to eliminate or reduce waste. For example, Cargill Dow has developed a way to use corn to make biodegradable plastic that is used in carpets, t-shirts, and the plastic baskets in which strawberries are sold. Corn-made plastic reduces greenhouse gas emissions by 20 to 60 percent. Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

FOUNDATIONS OF MANAGEMENT Fall 2008 - The End
UNIT 6 – Organization Design and Culture BUAD 230 C, Fall 2008 FOUNDATIONS OF MANAGEMENT Fall The End Dr. Eliot S. Elfner Professor of Business Administration St. Norbert College Copyright © 2008 by Dr. Eliot S. Elfner, St. Norbert College

FOUNDATIONS OF MANAGEMENT Fall 2008

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