Chapter 14 Sum.

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CHAPTER 14

Basic Elements of Control

The final section of the book, Part V, “Controlling,” covers the fourth basic managerial function, the controlling process. It consists of two chapters. Chapter 14 introduces the controlling process, while Chapter 15 focuses on three specific topics in controlling: operations, quality, and productivity.

CHAPTER SUMMARY

Chapter 14 introduces and covers the basic elements of control in organizations. It first characterizes the nature of control. Subsequent sections discuss operations, financial, structural, and strategic control. The chapter concludes with a description of how the control process can be more effectively managed.

OBJECTIVES

After studying this chapter, students should be able to:

1 Explain the purpose of control, identify different types of control, and describe the steps in the control process.

2 Identify and explain the three forms of operations control.

3 Describe budgets and other tools for financial control.

4 Identify and distinguish between two opposing forms of structural control.

5 Discuss the relationship between strategy and control, including international strategic control.

6 Identify characteristics of effective control, why people resist control, and how managers can overcome this resistance.

The numbers at McDonald’s are staggering. The company serves 50 million meals daily in 118 countries. More than 27 million of these meals are served at drive-through windows. Such an immense scale of operations requires an extraordinarily tight control system. McDonald’s’ focus on store expansion took management’s attention away from operational control and the company saw poor financial results. Now the company’s “Plan to Win” strategy shifts focus back to running current restaurants more efficiently.

Management Update: McDonald’s continues to do well financially by growing both U.S. and international sales. It reported revenues of $21.6 billion and net income of $4.4 billion in 2006. It sold Chipotle Mexican Grill to focus more on its core business.

OUTLINE

The Nature of Control

Control is the regulation of organizational activities in such a way as to facilitate goal attainment. Without control, organizations have no indication of how well or poorly they are performing. Control indicates the need for intervention if some targeted element of performance falls outside of acceptable limits.

A good analogy to use to describe control is that of a space flight to Mars. After a rocket is launched, NASA scientists continually monitor its progress toward its target, or goal. During the flight, they may have to make periodic corrections to nudge it back on course. Some corrections may be large, others small; some will be in one direction, others in a different direction; and there will be some periods when no corrections are needed. This process of monitoring progress toward the goal and then making required corrections is control.

A The Purpose of Control

Control has a number of functions in organizations. Four functions in particular are important.

1 A properly designed control system can help managers anticipate, monitor, and respond to a changing environment.

2 Over time, small mistakes may accumulate and become serious. An adequate control system will help to limit the accumulation of error.

Extra Example: Another example of error accumulation would be a manufacturer with a small error in its production system that gets carried through hundreds or thousands of products before it is discovered.

3 As organizations expand and create a variety of products, control helps them to cope with organizational complexity.

Though control is important to any organization, it is especially important in large, complex organizations. Problems and weaknesses in these kinds of settings can go undetected and become ever more serious if control systems do not identify them on a timely basis.

Global Connection: To carry the preceding idea further, international firms have even more complex control requirements. This point is covered later in the chapter.

4 Control can help to minimize costs, reduce waste, and improve productivity.

B Types of Control

The common room thermostat is also a control device. When the temperature reaches a certain level, a climate control system is activated. When the temperature changes to the targeted level, the system shuts down.

1 Areas of control

Control is concerned with efficiently and effectively combining an organization’s physical, human, information, and financial resources into appropriate outputs.

Extra Example: Effective control is credited with Wal-Mart’s success. While its primary competitor, Kmart, was concentrating on marketing and advertising, Wal-Mart managers were focusing on cutting costs, improving efficiency, enhancing operations, and so forth.

2 Levels of control

Control can also be classified by level, such as operations, financial, structural, or strategic control.

3 Responsibilities for control

Responsibilities for control fall to managers, one or more specialized management positions called controller, and, more and more often, to employees as well.

C Steps in the Control Process

1 The first step is establishing standards.

a A control standard is a target against which subsequent performance will be compared.

b Standards should be expressed in measurable terms and consistent with the organization’s goals.

c Managers must identify performance indicators, measures of performance that provide information that is directly relevant to what is being controlled.

2 The second step is measuring performance.

a Using the performance indicators chosen in the previous step, managers monitor performance on an ongoing basis.

b Performance measures differ across level and function. Valid performance measures are difficult to develop and difficult to monitor for some activities.

3 The third step is comparing actual performance against the standards.

a Comparing performance against standards will result in performance that is higher, lower, or equal to the standards.

b Extenuating circumstances must also be considered.

c The timetable for conducting comparisons will vary depending on what is being controlled.

4 The fourth step is considering corrective action.

Once the comparison between performance and standards has been made, an action must be taken. Three choices exist: do nothing, take corrective action, or change the standard.

II Operations Control

Operations control focuses on the processes used to transform resources into products or services. Most firms use multiple control systems.

A Preliminary Control

Preliminary control attempts to monitor the quality of financial, physical, human, and information resources before they actually become part of the system. Thus, preliminary control concentrates on inputs to the system early in the overall process.

Extra Example: Ford Motor Company used preliminary control when it raised the product quality standards that must be met by its suppliers, for example, and pressured them to lower their costs so that Ford can lower its own costs.

Preliminary control is also called steering control or feedforward control.

B Screening Control

Screening control relies heavily on the feedback process. Thus, it takes place during the transformation process. As the outputs are produced, they are screened at checkpoints to make sure they meet the standards.

Screening control is also called yes/no control or concurrent control.

C Postaction Control

Postaction control monitors the output or results of the organization after the transformation process is complete. Thus, postaction control focuses on determining if the outputs of the organization meet the established standards.

Extra Example: Levi Strauss relies heavily on postaction control. The firm requires that every pair of jeans it makes be inspected before it leaves the factory.

It should be stressed that, as noted in the text, most firms use more than one form of operations control. For example, even though Ford is forcing its suppliers to improve the quality of the parts they ship to the automaker, Ford still pays attention to screening and postaction control as well.

III Financial Control

Financial control is the control of financial resources as they flow into the organization, are held by the organization, and flow out of the organization.

Interesting Quote: “The environment was ripe for abuse. Nobody at corporate was asking the right questions. It was completely hands-off management. A situation like that requires tight controls. Instead, it was a runaway train.” (A former Enron manager, quoted in Business Week, “At Enron, ‘The Environment Was Ripe for Abuse,’” February 25, 2002)

Interestingly, even though managers consider human resources to be the most critical resource for organizations, financial resources are probably a more important resource to be controlled.

A Budgetary Control

A budget is a plan expressed in numerical terms.

1 Most organizations use three types of budgets.

a Financial budgets indicate where the organization expects to get its cash for the coming time period and how it plans to use it. Examples include balance sheet budgets and cash budgets.

b Operating budgets are concerned with planned operations within the organization. Examples include sales budgets and expense budgets.

c Nonmonetary budgets are expressed in nonfinancial terms, such as units of output or hours of direct labor. Examples include production budgets and space budgets.

Extra Example: Some students use nonmonetary budgets based on time to plan their studying—a certain number of hours on this day to study for one course, a different number of hours on that day for another course, and so forth.

2 Budgets were traditionally developed through a top-down process. Many organizations today, however, are beginning to allow more participation by all managers in the budget development process.

As noted in the text, many organizations today are allowing more people at lower levels of the organization to participate in the budgeting process. This process is consistent with the topics of participation, empowerment, decentralization, and work teams, discussed in various other chapters.

3 The budgeting process has several strengths, including facilitation of effective control, better ability to monitor operations, ease in identifying problem areas, improved coordination and communication, assistance in planning, and recording of organizational performance. Weaknesses of budgeting include the relative lack of flexibility, the time it takes to prepare the budget, and the possible limiting effect on change.

Example: Tenneco and Texas Instruments are other firms that have cut back on the budgets they use. However, managers at both firms stress the fact that budgets cannot be eliminated altogether and that the budgets they have retained play a vital role in their respective organizations.

B Other Tools of Financial Control

1 A financial statement is a profile of some aspect of an organization’s finances.

a A common financial statement is the balance sheet, which lists the assets and liabilities of an organization at a specific point in time.

b Another common financial statement is the income statement, which summarizes financial performance over a period of time.

2 Ratio analysis is the calculation of one or more financial ratios from the information in a firm’s financial statements. Liquidity, debt, return, coverage, and operating ratios are usually assessed.

3 A financial audit is an independent appraisal of the firm’s accounting, financial and operational systems.

a All publicly traded firms are required to undergo periodic audits and to release the results to the public.

Note that many recent corporate scandals, including Enron, WorldCom, Tyco, Global Crossings, and others, were the result of financial misdeeds that were not uncovered or reported by auditors.

Cross-Reference: Chapter 2 provides information about the Sarbanes-Oxley Act of 2002, which established higher standards for audits, along with stiffer penalties if standards are not upheld.

b Financial audits can be external (performed by independent external auditors) or internal (performed by employees of the organization).

Extra Example: Whether or not they have an internal auditing staff, publicly traded corporations must have their financial statements audited by an external firm. If you obtained corporate annual reports in response to one of the previous Teaching Tips, note that the reports include a statement from the firm’s auditors.

IV Structural Control

Structural control deals with the effectiveness of the firm’s organization design.

A Bureaucratic control is characterized by formal and mechanistic structural arrangements designed to extract employee compliance.

Extra Example: General Motors is an example of a firm that relies on bureaucratic control. Myriad rules, regulations, and standard operating procedures dictate what people and operating units can and cannot do.

B Decentralized control is based on informal and organic structural arrangements, such as group norms and organizational culture, to obtain self-controlled behavior in employees.

Extra Example: Apple Computer uses decentralized control. Its employees generally support the organization and work well together. Consequently, they need fewer rules and regulations.

Extra Example: Decentralized control is also referred to as decentralized control.

V Strategic Control

Strategic control is aimed at ensuring that the organization is maintaining an effective alignment with its environment and moving toward achieving its strategic goals.

A Integrating Strategy and Control

Effective strategic control focuses on structure, leadership, technology, human resources, and information and operational control systems.

B International Strategic Control

1 Strategic control is especially important for international businesses due to their large size, complexity, and geographic diversity.

2 Some international businesses use a centralized control system, whereas others favor decentralization.

Global Connection: Some German firms today are struggling because of inadequate strategic control. They have continued to focus so much attention on quality without balancing that quality against cost that today their sales are slipping. Their products are known to be of high quality, but they cost so much more than competing products that people have more trouble buying them.

Extra Example: Daimler-Benz, the manufacturer of Mercedes automobiles, is a good example of a firm experiencing the kinds of troubles noted above. Indeed, the aforementioned costs were a major factor in the firm’s decisions to construct an assembly plant in the United States and to merge with Chrysler.

VI Managing Control in Organizations

A Characteristics of Effective Control

1 Control must be integrated with planning. The more explicit and precise the linkages between planning and control are, the more effective the control system will be. To achieve this, one must account for the control system as the plans are developed.

Teaching Tip: In some ways, planning and control are the two most integrated management functions. Planning helps determine what the organization wants to do and control keeps the organization on track toward doing it.

2 The control system itself must be flexible enough to accommodate changes.

3 Control systems must be accurate to be effective.

Extra Example: Waterford Crystal suffered some performance problems because of flaws in its control system. One source of difficulty for the firm was that its accounting system was inadvertently camouflaging higher-than-projected production costs.

4 Information must be presented from the control system at the time when it will do the most good.

5 The information provided by the control system must be as objective as possible.

Extra Example: Another control problem at Waterford resulted from the fact that important information was being subjectively interpreted by inadequately trained employees before managers ever saw it.

B Resistance to Control

1 Overcontrol occurs when an organization attempts to control too many things. Employees tend to resist if too many controls are placed on them.

Global Connection: Managers in India are especially prone to resist control. They view the presence of control measures and systems as indicators that their organization lacks confidence in their abilities.

2 If the control system focuses too much on quantitative variables or if the focus is too narrow, problems can occur.

3 Control systems must not reward inefficiency. Cutting departments’ budgets the following year if not all of their resources are spent is an example of rewarding inefficiency.

4 Accountability for one’s work is increased when control systems are in place and this may promote resistance.

C Overcoming Resistance to Control

Resistance can be partially overcome if the control systems are integrated into the planning system and are flexible, accurate, timely, and objective. In addition, people should not be overcontrolled or rewarded for inefficiency.

1 Encouraging employee participation is another way to overcome resistance to control. If employees are involved in developing the control systems, there is also generally less resistance.

Reliance on work teams and empowered employees needs to be accompanied by an increase in self-control if employees are to feel that they really have a voice in their own work.

2 Another way to overcome resistance to control is to develop verification procedures. Managers can use checks and balances to ensure that the control systems are providing the data needed to compare performance against standards and use multiple systems to cross-check the usefulness of the control system reports.

One of the biggest challenges facing managers is finding the appropriate balance of control. They need to have sufficient control to avoid problems, but they also need to avoid overcontrol.

Questions for Review

1 What is the purpose of organizational control? Why is it important?

The purpose of control is to let the organization know how well it is doing by comparing where performance is, relative to a standard of where it should be. Control helps the organization fulfill its goals by adapting to change, reducing the compounding of errors, coping with complexity, and minimizing costs.

2 What are the different levels of control? What are the relationships between the different levels?

At the lowest level, operational and financial controls address issues about transformation processes and use of financial resources. At the mid-level, structural control helps monitor each element of the organization’s structure. At the highest level, strategic control ensures that the organization effectively meets its strategic goals. Effective strategic control enables effective structural control, which enables effective operational and financial control.

3. Describe how a budget is created in most organizations. How does a budget help a manager with financial control?

Typically, operating units submit budget requests to divisional managers, who in turn submit requests to a high-level budget committee. The committee, which consists of the CEO, controller, and other high-level finance managers, approves requests and formulates an organization-wide budget. For operational and divisional managers, budgets serve as an indicator of the organization’s strategic intent. These managers also use budgets to monitor and correct deviations in their use of resources. Top-level managers use budgets to control performance of each division and unit in the firm.

4. Describe the differences in bureaucratic and decentralized control. What are the advantages and disadvantages of each?

Bureaucratic control works to ensure employee compliance with directives through rules and hierarchy, top-down decision making, and limited participation from lower level employees. Bureaucratic control is directed at maintaining a minimum level of acceptable performance by individual workers. Decentralized control works to ensure employee commitment to organizational goals by the use of group norms and culture, a flat structure, and a lot of participation from lower level employees. Decentralized control is directed at achieving superior performance above the acceptable minimum and it focuses on group performance.

Bureaucratic control is quicker and simpler to develop and gives clear-cut guidance to managers, but it can be rigid, it doesn’t reward excellence, and employees may be frustrated by too many rules and lack of participation. Decentralized control gives opportunities for participation, rewards excellence and creativity, and encourages teamwork. However, decentralized control can be ambiguous and expensive, and can take a great deal of time to develop.

5. Why do some people resist control? How can managers help overcome this resistance?

One reason that individuals resist control is due to overcontrol—the attempt by the organization to control too many things. Individuals also resist when the focus of control is inappropriate or when they fear too much accountability.

There are several ways managers can overcome resistance to change. If you start with a good control system and accurate controls, workers are less likely to resist the system. People are more likely to accept controls if they participate in their design and implementation. Many forms of checks and balances can be instituted to ensure there will be less resistance to change.

Questions for Analysis

6. How can a manager determine whether his or her firm needs improvement in control? If improvement is needed, how can the manager tell what type of control needs improvement (operations, financial, structural, or strategic)? Describe some steps a manager can take to improve each of these types of control.

Symptoms of poor control may include excessive costs or waste of other resources, too many errors or defects, an inability to adapt in response to changes, and lack of managerial capability in the face of organizational complexity.

Operations control would help in improving the transformation process, such as more training for workers to reduce product defects or a new system for obtaining customer satisfaction feedback. Financial control is best for control of resources. This would include budgets, financial statements, and audits. Structural control is needed when the various elements of the firm cannot work together effectively. The performance appraisal system, the goal-setting system, and data sharing on the information system are all examples of structural control. Strategic control is required for issues related to long-term goals, and includes top leadership capability and growth and profitability targets.

7. One company uses strict performance standards. Another has standards that are more flexible. What are the advantages and disadvantages of each system?

A strict system is simple to develop and implement, gives clear-cut output, and has an appearance of fairness, yet it can be overly rigid and easily becomes outdated or irrelevant when changes occur. A more flexible system is easily adapted to changing circumstances and can accommodate complex situations more readily. However, a flexible system requires constant updating, may appear to be less fair, and can be confusing and difficult to implement.

8. Are the differences in bureaucratic control and decentralized control related to differences in organization structure? If so, how? If not, why not? (The terms do sound similar to those used in discussing the organizing process.)

Bureaucratic control suggests strict rules, formal controls, and a rigid hierarchy, which is consistent with the mechanistic form of organizational structure. In tall organizations, bureaucratic control is a top-down process with limited participation by subordinates. Bureaucratic control does not seem to necessitate the technical competence dimension of the bureaucratic form of organization. So, while similar, they are not the same. Decentralized control is more like the organic organization, with group norms used for formalization, a flat structure with shared information, and a participative informal environment.

9. Many organizations today are involving lower-level employees in control. Give at least two examples of specific actions that a lower-level worker could do to help his or her organization better adapt to environmental change. Then do the same for limiting the accumulation of error, coping with organizational complexity, and minimizing costs.

Clearly, answers will vary, but they may note lower-level workers can monitor environmental change by seeking customers’ opinions or speaking to workers in similar jobs at competing firms. Lower-level workers can be critically important in limiting the accumulation of error, because many of the errors may originate at the lowest level and lower-level workers may be more aware of the impact of errors on customers. Lower-level employees can help the firm cope with complexity by aiding managers in the development and implementation of sophisticated control systems. Cost minimization is crucial at the lower levels of the firm, as employees can work to reduce waste, defects, wasted time, and other items that contribute to high expenses.

10. Describe ways that the top management team, midlevel managers, and operating employees can participate in each step of the control process. Do all participate equally in each step, or are some steps better suited for personnel at one level? Explain your answer.

The top management team will probably be most involved in issues of strategic control because this team sets the organization’s long-term goals and then must monitor goal achievement. Middle managers would typically have the highest involvement in structural control, as they are responsible for ensuring that all elements of the organization work together effectively. Lower-level employees are probably most active in operational control, due to their expertise in the organization’s transformation processes. All managers have responsibility for financial control at their level in the firm.