1. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 1 CHAPTER SEVEN CHAPTER SEVEN Management 3rd Edition Chuck Williams Control Prepared by Deborah Baker Texas Christian University

2. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2 CHAPTER SEVEN What Would You Do? You are in charge of Washington Mutual, the U.S.’s sixth largest bank.  In growing so fast, WaMu has created and acquired a number of problems  You are concerned about costs, keeping customers, and staying ahead of aggressive competition How can you keep costs under control? How can you keep customers? What would you do?

3. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 3 CHAPTER SEVEN Basics of Control After reading the next two sections, you should be able to: 1.describe the basic control process. 2.answer the question: Is control necessary or possible?

4. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 4 CHAPTER SEVEN The Control Process 1 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 More

5. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 5 CHAPTER SEVEN Setting Standards 1.1  Determine what should be benchmarked  Identify companies against which to benchmark standards  Collect data on other companies’ performance standards

6. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 6 CHAPTER SEVEN Corrective Action 1.3  Identify performance deviations  Analyze those deviations  Develop and implement programs to correct them

7. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 7 CHAPTER SEVEN Dynamic, Cybernetic Process 1.4 Set Standards Actual Performance Desired Performance Implement Program for Corrective Action Develop Program for Corrective Action Measure Performance Compare with Standards Identify Deviations Analyze Deviations Adapted from Exhibit 7.1

8. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 8 CHAPTER SEVEN Feedback, Concurrent, and Feedforward Control 1.5 Feedback Control Gather information about performance deficiencies after they occur Concurrent Control Gather information about performance deficiencies as they occur Feedforward Control Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur

9. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 9 CHAPTER SEVEN Feedforward Control 1.5 Guidelines for Using Feedforward Control 1.Thorough planning and analysis are required. 2.Careful discrimination must be applied in selecting input variables. 3.The feedforward system must be kept dynamic. 4.A model of the control system should be developed. 5.Data on input variables must be regularly collected. 6.Data on input variables must be regularly assessed. 7.Feedforward control requires action. 1.Thorough planning and analysis are required. 2.Careful discrimination must be applied in selecting input variables. 3.The feedforward system must be kept dynamic. 4.A model of the control system should be developed. 5.Data on input variables must be regularly collected. 6.Data on input variables must be regularly assessed. 7.Feedforward control requires action. Adapted from Exhibit 7.2

10. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 10 CHAPTER SEVEN Is Control Necessary or Possible? 2 Is more control necessary? Is more control possible? If more control is necessary, but not possible, what should we do instead?

11. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 11 CHAPTER SEVEN 2.1 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

12. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 12 CHAPTER SEVEN 2.2 Is More Control Possible?  Cost of control  regulation costs  unintended consequences  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

13. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 13 CHAPTER SEVEN 2.3 Quasi- Control  Reducing dependence  choose to abandon or change goals  when control over a critical resource is not possible  Restructuring dependence  exchange dependence on one critical resource for dependence on another

14. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 14 CHAPTER SEVEN How and What to Control After reading the next two sections, you should be able to: 3.discuss the various methods that managers can use to maintain control. 4.describe the behaviors, processes, and outcomes that today’s managers are choosing to control their organizations.

15. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 15 CHAPTER SEVEN Control Methods 3 Normative Concertive Self-Control Bureaucratic Objective

16. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 16 CHAPTER SEVEN Bureaucratic Control 3.1  Top-down control  Use rewards and punishment to influence employee behaviors  Use policies and rules to control employees  Often inefficient and resistant to change

17. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 17 CHAPTER SEVEN Blast From The Past Five Eras of Management Control 1870-1900 1900-1922 1925-1955 1955-1980 1980-Present Industrial Betterment Scientific Management Human Relations Systems Rationalization Organizational Culture and Quality

18. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 18 CHAPTER SEVEN Objective Control 3.2  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

19. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 19 CHAPTER SEVEN Normative Control 3.3  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

20. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 20 CHAPTER SEVEN Concertive Control 3.4  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

21. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 21 CHAPTER SEVEN Self-Control 3.5  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

22. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 22 CHAPTER SEVEN What to Control? 4.1 Customer Perspective Customer Perspective Internal Perspective Innovation and Learning Perspective Innovation and Learning Perspective Financial Perspective The Balanced Scorecard looks at company performance through 4 perspectives:

23. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 23 CHAPTER SEVEN Advantages of the Balanced Scorecard 4.1  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

24. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 24 CHAPTER SEVEN 4.1 Been There Done That  Used by 50% of Fortune 1000 companies in North America, and 40-45% in Europe  Organizations using it:  have strong leadership at the top  translated strategy into a balanced scorecard  cascaded the strategy down the organization  made the strategy everybody’s job An interview with the authors of the balanced scorecard: Kaplan and Norton

25. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 25 CHAPTER SEVEN 4.2 The Financial Perspective Cash flow analysis Predicts how changes in a business will affect its ability to take in more cash than it pays out Balance sheets Provide a snapshot of a company’s financial position at a particular time Income statements Show what has happened to an organization’s income, expenses, and net profit over a period of time.. Financial ratios Used to track liquidity, efficiency, and profitability over time compared to other businesses in its industry

26. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 26 CHAPTER SEVEN 4.2 Basic Accounting Tools  Basic Cash Flow Analysis Steps 1.Forecast sales 2.Project changes in anticipated cash flows 3.Project anticipated cash outflows 4.Project net cash flows by combining anticipated cash inflows and outflows  Parts of a Basic Balance Sheet 1.Assets  Current assets  Fixed assets 2.Liabilities  Current liabilities  Long-term liabilities 3.Owner’s equity  Stock  Additional paid in capital  Retained earnings Adapted from Exhibit 7.6

27. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 27 CHAPTER SEVEN 4.2 Basic Accounting Tools (continued) Adapted from Exhibit 7.6  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

28. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 28 CHAPTER SEVEN 4.2 Financial Ratios LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LEVERAGE RATIOS Debt to Equity Debt Coverage LEVERAGE RATIOS Debt to Equity Debt Coverage EFFICIENCY RATIOS Inventory Turnover Average Collections Period EFFICIENCY RATIOS Inventory Turnover Average Collections Period PROFITABILITY RATIOS Gross Profit Margin Return on Equity PROFITABILITY RATIOS Gross Profit Margin Return on Equity Adapted from Exhibit 7.7

29. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 29 CHAPTER SEVEN 4.2 Common Kinds of Budgets Adapted from Exhibit 7.8 Cash Budgets Expense Budgets Profit Budgets Profit Budgets Revenue Budgets Used to forecast the cash a company will have for expenses Used to determine spending on supplies, projects, or activities Used by profit centers, which have “profit and loss” responsibility Used to project or forecast future sales Variable Budgets Capital Expenditure Budgets Used to project costs across varying levels of sales/revenues Used to forecast large, long-lasting investments

30. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 30 CHAPTER SEVEN 4.2 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  Long-term bank loans  Interest paid to bondholders  Dividends and growth in stock value that accrue to shareholders

31. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 31 CHAPTER SEVEN 4.2 Economic Value Added (EVA) 1. Calculate net operating profit after tax 2. Identify how much capital the company has invested 3. Determine the cost paid for capital 4.Multiply capital used (step 2) times cost of capital (step 3) 5. Subtract total dollar cost of capital from net profit after taxes $3,500,000 $16,800,000 10% (10% x $16,800,000) = $1,680,000 $3,500,000 net profit -$1,680,000 cost of capital $1,820,000 EVA $3,500,000 net profit -$1,680,000 cost of capital $1,820,000 EVA Adapted from Exhibit 7.9

32. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 32 CHAPTER SEVEN 4.2 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

33. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 33 CHAPTER SEVEN 4.3 The Customer Perspective Controlling Customer Defections  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

34. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 34 CHAPTER SEVEN 4.4 The Internal Perspective Controlling Quality Measuring Quality Excellence Value Conformance to Expectations

35. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 35 CHAPTER SEVEN 4.5 Strategies for Waste Prevention/Reduction Good housekeeping Material/product substitution Process modification

36. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 36 CHAPTER SEVEN 4.5 The Innovation & Learning Perspective Controlling Waste and Pollution Adapted from Exhibit 7.14 Waste Disposal Waste Treatment Recycle & Reuse Waste Prevention & Reduction

37. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 37 CHAPTER SEVEN 4.5 What Would You Do--II? You have been hired to get Gap back in control…  Gap is losing money and it has been downgraded to junk bond status.  Its products have lost their appeal to the baby boomers.  Gap isn’t sure why customers are leaving empty- handed. What would you tackle first? How are you going to control what needs controlling? If you were the CEO of Gap, what would you do?