1. Chapter 16 ©2001 South-Western College Publishing Pamela S. Lewis Stephen H. Goodman Patricia M. Fandt Slides Prepared by Bruce R. Barringer University of Central Florida Pamela S. Lewis Stephen H. Goodman Patricia M. Fandt Slides Prepared by Bruce R. Barringer University of Central Florida Organizational Control in a Complex Business Environment

2. Transparency 16-2 © 2001 South-Western Publishing Learning Objectives Slide 1 of 3 1.Define and discuss the importance of organizational control. 2.Identify the sequence of steps to be undertaken in a thorough control system. 3.Identify the factors that are important considerations in the design of a control system. 4.Describe the various characteristics of effective control.

3. Transparency 16-3 © 2001 South-Western Publishing Learning Objectives Slide 2 of 3 5.Identify the factors that help determine the proper amount of control. 6.Define feedforward control, concurrent control, and feedback control. 7.Describe the difference between the philosophies of bureaucratic control and organic control.

4. Transparency 16-4 © 2001 South-Western Publishing Learning Objectives Slide 3 of 3 8.Describe some of the more important techniques and methods for establishing financial control. 9.Discuss some of the ethical issues related to the control of employee behavior.

5. Transparency 16-5 © 2001 South-Western Publishing Organizational Control Defined The systematic process through which managers regulate organizational activities to make them consistent with the expectations established in plans and to help them achieve all predetermined standards of performance.

6. Transparency 16-6 © 2001 South-Western Publishing Process of Control Slide 1 of 3 Setting Standards for Performance –Whenever possible, the standards should be set in a manner that allows them to be compared with actual performance. Measuring Actual Performance –An organization must decide: What to measure. When to measure. How frequently to measure.

7. Transparency 16-7 © 2001 South-Western Publishing Process of Control Slide 2 of 3 Comparing Actual Performance With Standards –This step involves determining if actual performance compared to standards falls within acceptable limits. Responding to Deviations –If the deviation from performance is unacceptable, then corrective action is warranted. If the deviation is acceptable, no correction action is necessary.

8. Transparency 16-8 © 2001 South-Western Publishing Process of Control Slide 3 of 3 Set performance standards Measure actual performance Compare performance with standards Take no corrective action Take corrective action If deviations are acceptable If deviations are unacceptable

9. Transparency 16-9 © 2001 South-Western Publishing Designing Quality and Effectiveness into the Control System Factors to consider when designing a control system: The amount of variety in the control system The ability to anticipate problems The sensitivity of the measuring device The composition of the feedback reports

10. Transparency 16-10 © 2001 South-Western Publishing Design Factors Affecting Control System Quality Slide 1 of 3 The Amount of Variety in the Control System –Variety refers to the number of activities, processes, or items that are measured and controlled. –Law of requisite variety Control systems must have enough variety to cope with the variety in the systems they are trying to control.

11. Transparency 16-11 © 2001 South-Western Publishing Design Factors Affecting Control System Quality Slide 2 of 3 Ability to Anticipate Problems –If a deviation can be anticipated before it occurs, corrective action can be instituted more quickly and the negative consequences of the deviation reduced. Sensitivity of the Measuring Device –Care must be taken to use a device that is sensitive enough to adequately measure the system being controlled.

12. Transparency 16-12 © 2001 South-Western Publishing Design Factors Affecting Control System Quality Slide 3 of 3 Composition of Feedback Reports –Variance reporting Highlighting only those things that fail to meet the established standards. –Management by exception Focusing on the elements that are not meeting the standards.

13. Transparency 16-13 © 2001 South-Western Publishing Control System Design Issues Slide 1 of 2 Step 1: Set standards of performance Step 2: Measure actual performance Control Process StepsDesign Considerations Design factors - Variety - Anticipation - Sensitivity - Feedback reporting Effectiveness criteria - Related to strategy - Complete - Use objective and subjective measures - Timely - Acceptable

14. Transparency 16-14 © 2001 South-Western Publishing Control System Design Issues Slide 2 of 2 Step 3: Compare performance with standards Step 4: Respond to deviations Control Process StepsDesign Considerations Select proper amount - Cost - Reliability - Process importance Select focal point - Feedforward focus - Concurrent focus - Feedback focus - Multiple focus

15. Transparency 16-15 © 2001 South-Western Publishing Criteria for Effective Control Slide 1 of 3 Is Related to Organizational Strategy –A control system should measure what is important now and what will be important in the future. Utilizes All Steps in the Control Process –To be effective, a control system must employ all of the steps in the control process.

16. Transparency 16-16 © 2001 South-Western Publishing Criteria for Effective Control Slide 2 of 3 Composed of Objective and Subjective Measures –Effective control systems typically require managers to blend quantitative (objective) and qualitative (subjective) performance measures. Incorporates Timeliness in Feedback Reporting –Timeliness is the degree to which the control system provides information when it is needed.

17. Transparency 16-17 © 2001 South-Western Publishing Criteria for Effective Control Slide 3 of 3 Acceptable to a Diverse Work Force –To be effective, organizational controls must be accepted by employees. –The control system should motivate workers to recognize standards and act to achieve them.

18. Transparency 16-18 © 2001 South-Western Publishing Selecting the Proper Amount of Control Slide 1 of 3 Costs in the Control System –Two basic categories of costs need to be considered: The costs associated with the information needed to perform the control process. The costs associated with undesirable deviations from standards.

19. Transparency 16-19 © 2001 South-Western Publishing Selecting the Proper Amount of Control Slide 2 of 3 Reliability of the System –Reliability refers to the probability that the object or process being controlled will consistently behave in an acceptable manner. –The basic premise is that the more reliable the process, the less control that is needed.

20. Transparency 16-20 © 2001 South-Western Publishing Selecting the Proper Amount of Control Slide 3 of 3 Importance of the Process Being Controlled –The more important the object or process being controlled, the greater the amount of control that should be exercised.

21. Transparency 16-21 © 2001 South-Western Publishing Selecting the Focal Point for Control Slide 1 of 2 Feedforward (Preventive) Control –Focuses on detecting undesirable material, financial, or human resources that serve as inputs to the transformation process. Concurrent Control –Focuses on the transformation process to ensure that it is functioning properly.

22. Transparency 16-22 © 2001 South-Western Publishing Selecting the Focal Point for Control Slide 2 of 2 Feedback Control –Focuses on discovering undesirable output and implementing corrective action. Multiple Focal Points –Most organizations use several control systems focused on various phases of the transformation process.

23. Transparency 16-23 © 2001 South-Western Publishing Control Focal Points Control system Transformation process InputsOutputs Feedforward control Concurrent control Feedback control

24. Transparency 16-24 © 2001 South-Western Publishing Managerial Control Philosophies Bureaucratic Control Organic Control Use of formal mechanisms to influence behavior, assess performance, and correct unacceptable deviations from standards. Reliance upon social values, traditions, shared beliefs, flexible authority, and trust to assess performance and correct unacceptable deviations.

25. Transparency 16-25 © 2001 South-Western Publishing Factors Favoring Bureaucratic vs. Organic Controls Bureaucratic Control Organic Control Task-oriented management style Culture favors decision making at the top Employees that lack education and experience Performance that can be quantified and measured Relationship-oriented management style Culture encourages employee participation Highly educated, highly trained employees Performance that is difficult to measure

26. Transparency 16-26 © 2001 South-Western Publishing Mechanisms for Financial Control Slide 1 of 3 Financial Statements –Balance sheet Summary of an organization’s financial position at a given point in time, showing assets, liabilities, and owner’s equity. –Income statement Summary of an organization’s financial performance over a given time interval, showing revenues, expenses, and bottom- line profit or loss.

27. Transparency 16-27 © 2001 South-Western Publishing Mechanisms for Financial Control Slide 2 of 3 Financial Ratios –Liquidity ratios Indicators of the firm’s ability to meet its short-term debt obligations. –Profitability ratios Indicators of the relative effectiveness, or profitability, of the organization.

28. Transparency 16-28 © 2001 South-Western Publishing Mechanisms for Financial Control Slide 3 of 3 Financial Ratios (cont.) –Debt ratios Indicators of the firm’s ability to handle long-term debt. –Activity ratios Indicators of performance with respect to key activities defined by management.

29. Transparency 16-29 © 2001 South-Western Publishing Ethical Issues in the Control of a Diverse Work Force Drug Testing Undercover Surveillance Computer Monitoring

30. Transparency 16-30 © 2001 South-Western Publishing Guidelines for the Successful Manager of the Future Slide 1 of 4 Develop a control system for each important product, service, process, or activity within the organization. Incorporate sufficient variety, sensitivity, anticipation capability, and feedback into the control system.

31. Transparency 16-31 © 2001 South-Western Publishing Guidelines for the Successful Manager of the Future Slide 2 of 4 Gauge the control system’s effectiveness by considering its relationship to corporate strategy, its completeness, the degree to which it incorporates objective and subjective performance measures, its timeliness, and its acceptability to individuals within the organization.

32. Transparency 16-32 © 2001 South-Western Publishing Guidelines for the Successful Manager of the Future Slide 3 of 4 Determine the appropriate points within the organization where control systems should be focused. Understand the intricacies of the financial data contained in the organization’s financial statements, and use various financial control techniques to assess the firm’s financial health.

33. Transparency 16-33 © 2001 South-Western Publishing Guidelines for the Successful Manager of the Future Slide 4 of 4 Adopt a philosophy of control that is consistent with the management style, corporate culture, employee professionalism, and performance measures present within the organization.