Chapter 13

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives L01: Explain why companies develop control systems for employees. L02: Summarize how to design a basic bureaucratic control system. L03: Describe the purposes for using budgets as a control device. L04: Define basic types financial statements and financial ratios used as controls. Learning Objectives L05: List procedures for implementing effective control systems. L06: Identify ways in which organizations use market control mechanisms. L07: Discuss the use of clan control in an empowered organization. Spinning out of control? Lax top management Absence of policies Lack of agree-upon standards ?Shoot the messenger? management Lack of periodic reviews Bad information systems Lack of ethics in the culture Different Types of Control Control - any process that directs the activities of individuals toward the achievement of organizational goals Bureaucratic Control - the use of rules, regulations, and authority to guide performance Market Control - control based on the use of pricing mechanisms and economic information to regulate activities within organizations Clan Control - control based on the norms, values, shared goals, and trust among group members Test Your Knowledge There are three broad strategies for achieving organizational control. Describe these strategies and provide an example of each. The Control Process Four Steps of Control Systems 1. Setting performance standards Standard - expected performance for a given goal, a target that establishes a desired performance level; motivates performance, and serves as a benchmark against which actual performance is assessed 2. Measuring performance 3. Comparing performance against the standards and determining deviations Principle of Exception - a managerial principle stating that control is enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard Four Steps of Control Systems (cont?d.) 4. Taking action to correct problems and reinforce successes In computer-controlled production technology, two basic types of control are feasible: Specialist control - operators of computer-numerical-control(CNC) machines must notify engineering specialists of malfunctions so that they can take corrective actions. Operator control - multiskilled operators can rectify their own problems as they occur. Bureaucratic Control Feedforward Control - the control process used before operations begin, including policies, procedures, and rues designed to ensure that planned activities are carried out properly. Concurrent control - the control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed. Feedback Control - Control that focuses on the use of information about previous results to correct deviations from the acceptable standard. Six Sigma Six Sigma - a quality control tool designed to reduce defects in all organization processes Sigma is the Greek letter used in statistics to designate the estimated standard deviation or variance in a process. The lower the sigma number, the higher the level of variation or defects. The higher the sigma number, the lower the level of variation or defects. At six-sigma-level, a process is producing fewer than 3.4 defects per million (approximately 99.99966 accuracy) Management Audits for Various Systems Management Audit - an evaluation of the effectiveness and efficiency of various systems within an organization External Audit - an evaluation conducted by one organization, such as a CPA firm, on another Internal Audit - a periodic assessment of a company?s own planning, organizing, leading, and controlling processes Budgeting (budgetary controlling)- the process of investigating what is being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences Test Your Knowledge Bruce Genero is a financial manager at Flavors, Inc., a lollipop manufacturer. One of his duties as manager is to provide a budget that shows the anticipated receipts and expenditures of his department. The budget also shows the amount of working capital available and the extent to which outside financing may be required. Bruce produces this budget after all other estimation is complete. Which type of budget is Bruce currently working on? A) Master budget B) Cash budget C) Cost production budget D) Production budget E) Sales budget Three Stages of Budgetary Control Establishing expectancies starts with the broad plan for the company and the estimate of sales, and it ends with budget approval and publication. The budgetary operations stage deals with finding out what is being accomplished and comparing the results with expectancies. The last stage, as in any control process, involves responding appropriately with some combination of reinforcing successes and correcting problems. A Sales-Expense Budget Types of Budgets? Sales budget Production budget Cost budget Cash budget Capital budget Master budget Accounting Audits Accounting Audits - procedures used to verify accounting reports and statements Activity-Based Costing (ABC) - a method of cost accounting designed to identify streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities Financial Controls Balance Sheet - a report that shows the financial picture of a company at a given time and itemizes assets, liabilities, and stockholders? equity. Assets - the values of the various items the corporation owns Liabilities - the amount a corporation owes to various creditors Stockholders? Equity - the amount accruing to the corporation?s owners Financial Controls Total assets = Total liabilities + Stockholders? Equity Profit and Loss Statement - an itemized financial statement of the income and expenses of a company?s operations Current Ratio - a liquidity ratio that indicates the extent to which short-term assets can decline and still be adequate to pay short-term liabilities Financial Controls Debt-Equity Ratio - a leverage ratio that indicates the company?s ability to meet its long-term financial obligations Return on Investment (ROI) - A ratio of profit to capital used, or a rate of return from capital Management Myopia Management Myopia - focusing on short-term earnings and profits at the expense of longer-term strategic obligations A Comparative Balance Sheet A Comparative Statement of Profit and Loss Downsides to Bureaucratic Control Rigid bureaucratic behavior Tactical behavior Resistance Ways to Make Control Systems More Effective The systems are based on valid performance standards. They communicate adequate information to employees. They are acceptable to employees. They use multiple approaches. They recognize the relationship betweem empowerment and control. Test Your Knowledge Read the Story on Page 294 Identify some criteria that you think Szaky would use in establishing performance standards for TerraCycle. What methods might he use to measure performance? What elements of budgetary control does Szaky use to help his business develop and grow? Seven ?Deadly Sins? of Performance Measurement Vanity - using measure that are sure to make managers and the organization look good Provincialism - limiting measure to functional or departmental responsibilities, rather than the organization?s overall objectives Narcissism - measuring from the employee?s, manager?s, or company?s point of view, rather than the customer?s Laziness - not expending the effort to analyze what is important to measure By Michael Hammer Seven ?Deadly Sins? of Performance Measurement Pettiness - measuring just one component of what affects business performance Inanity - failing to consider the way standards will affect real-world human behavior and company performance Frivolity - making excuses for poor performance rather than taking performance standards seriously By Michael Hammer Test Your Knowledge Casinos control card dealers by using multiple controls. Which of the following would NOT be a correct tool used as one of the multiple controls? A) Requiring them to have a card dealer's license before being hired. B) Using various forms of direct scrutiny, including closed-circuit cameras, two way mirrors, and direct supervision. C) Requiring detailed paperwork to audit transfers of cash and cash equivalents. D) Requiring employees to be searched before they leave the premises. Market Control Market controls let supply and demand determine prices and profits. Price becomes an indicator of the value of the good or service. Price competition has the effect of controlling productivity and performance. Market controls can be at the corporate, business unit, and individual level. Transfer Price - price charged by one unit for a good or service provided to another unit within the organization Examples of Market Control Test Your Knowledge Briefly describe market control at the corporate level, business unit level, and the individual level. Clan Control Clan control relies on empowerment and culture. Practical guidelines for managing in an empowered world: Put control where the operation is. Use ?real time? rather than after-the-fact controls. Rebuild the assumptions underlying management control to build on trust rather than distrust. Move to control based on peer norms. Rebuild the incentive systems to reinforce responsiveness and teamwork. Test Your Knowledge Control that is based on the idea that employees may share the values, expectations, and goals of the organization and act in accordance with them, is called: A) corporate culture control (CCC). B) authority control. C) bureaucratic control. D) "no control". E) clan control. YOU should be able to L01: Explain why companies develop control systems for employees. L02: Summarize how to design a basic bureaucratic control system. L03: Describe the purposes for using budgets as a control device. L04: Define basic types financial statements and financial ratios used as controls. YOU should be able to L05: List procedures for implementing effective control systems. L06: Identify ways in which organizations use market control mechanisms. L07: Discuss the use of clan control in an empowered organization.