1. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 1 Chapter 10 Controlling in Organizations

2. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 2 Learning Objectives Explain the foundations of control. Identify the six phases of the corrective control model. Describe the primary methods of organizational control. Explain several key corporate governance issues and control mechanisms.

3. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 3 Foundations of Control Control involves the processes for ensuring that behaviors and performance conform to an organization’s standards, including rules, procedures, and goals. Preventive controls are mechanisms intended to reduce errors and thereby minimize the need for corrective action. Corrective controls are mechanisms intended to reduce or eliminate unwanted behaviors or results and thereby achieve conformity with the organization’s regulations and standards.

4. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 4 Examples of Different Sources and Types of Control (adapted from Table 10.1) Types of Control Source of control Preventive Corrective StakeholdersMaintaining quotas for hiring Changing recruitment policies personnel in protected class to attract qualified personnel OrganizationUsing budgets to guideDisciplining an employee for expendituresviolating a “No Smoking” safety regulation in a hazardous area GroupAdvising a new employee aboutHarassing and socially the group’s norm in relation to isolating a worker who doesn’t expected level of output conform to group norms IndividualDeciding to skip lunch in orderRevising a report you have to complete a project on timewritten because you are dissatisfied with it

5. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 5 Linkage to Strategic Goals Controls should be linked to the strategic goals of the organization. A good organizational control will be: –Objective –Complete –Timely –Acceptable

6. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 6 Cost-Benefit Model of Organizational Control (adapted from Figure 10.1)

7. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 7 Corrective Control Model (adapted from Figure 10.2) 1. Define the System 5. Make Comparisons If okay continue 2. Identify Key Characteristics 3. Set Standards 4. Collect Information If deviations 6. Diagnose And Correct Problems

8. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 8 Primary Organizational Control Methods (adapted from Figure 10.3) Mechanistic And Organic Control Organizational Control Market Control Financial and Accounting Controls Automation- Based Control

9. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 9 Mechanistic and Organic Control Methods (adapted from Table 10.2) Mechanistic Control Methods Use of detailed rules and procedures whenever possible Top-down authority, with emphasis on positional power Activity-based job descriptions that prescribe day-to-day behaviors Emphasis on extrinsic rewards (wages, pensions, status symbols) Distrust of teams, based on an assumption that team goals conflict with organizational goals Organic Methods Use of detailed rules and procedures only when necessary Flexible authority, with emphasis on expert power and networks of influence Results-based job descriptions that emphasize goals to be achieved Emphasis on both extrinsic and intrinsic rewards (meaningful work) Use of team, based on an assumption that team goals and norms assist in achieving organizational goals

10. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 10 Market Control Market control involves the collection of data related to sales, prices, costs, and profits for guiding decisions and evaluating results. –Marketing control requires that: the costs of the resources used in producing outputs be measured monetarily, the value of the goods and services produced be defined clearly and priced monetarily, and the prices of the goods and services produced be set competitively –Two control mechanisms that meet these requirements are: Profit-Sharing Plans Customer Monitoring

11. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 11 Financial and Accounting Controls Financial control includes the mechanisms for preventing or correcting the misallocation of resources. Comparative financial analysis is the evaluation of a firm’s financial condition for two or more time periods.

12. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 12 Activity-Based Costing Model (adapted from Figure 10.4) Resources Goods And Services Activity Cost Assignment Resource Cost Assignment Activities Input Information Performance Evaluation Cost View Process View

13. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 13 Automation-Based Control Automation involves the use of self-regulating devices and processes that operate independently of people. Machine control utilizes self-regulating instruments or devices to prevent and correct deviations from preset standards.

14. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 14 Corporate Governance A corporation is a government-approved form of organization that allows different parties to contribute capital, expertise, and labor for the benefit of all of them. Corporate governance is the pattern of relations and controls between the stockholders, the board of directors, and the top management of a company.

15. Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 15 Corporate Governance (cont.) External control mechanisms –Sarbanes-Oxley Act  Criminal Accountability  Whistleblower Protection Internal control mechanisms –Board of Directors  Independent  Self-Assessment  Executive Compensation  Evaluation of CEO  Resource Allocation  Fiduciary Responsibility and Control