Chapter
16
Control
Management
4th Edition
Chuck Williams
Chapter 16
Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved
Prepared by
Deborah Baker
Texas Christian University
1
What Would You Do?
Walgreens’ Headquarters, Deerfield, Illinois.

Walgreens has been an exceptional
investment, but past performance is
no guarantee of future performance

Competition is increasing—from
warehouse discounters, CVS, WalMart, and PBM mail-order pharmacies

Non-prescription goods account for 33
percent of Walgreen’s sales
How can Walgreen continue to grow same store sales?
What can it do about its competition?
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2
Basics of Control
After reading this section,
you should be able to:
1.
describe the basic control process.
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3
The Control Process
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
1
But… control
isn’t always
worthwhile or
possible
Consists of feedback control,
concurrent control, feedforward control
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4
Setting Standards
1.
A good standard must enable goal achievement.
2.
Listening to customers or observing competitors.
3.
Benchmarking other companies.



Determine what to benchmark.
Identify the companies against which to benchmark.
Collect data to determine other companies’
performance standards.
1.1
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5
Comparison to Standards
1.
Compare actual
performance to
performance standards.
The use of “secret shoppers” helps verify that
performance standards are being met.
1.2
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6
Corrective Action

Identify performance
deviations

Analyze those
deviations

Develop and
implement programs
to correct them
Identify
Control
Process
Correct
1.3
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Analyz
e
7
Dynamic, Cybernetic Process
Set Standards
Develop & Implement
Program for
Corrective Action
Measure
Performance
Compare with
Standards
Analyze
Deviations
Identify
Deviations
1.4
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Adapted from Exhibit 16.1
8
Feedback, Concurrent,
and Feedforward Control
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
1.5
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9
Feedforward Control
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.
1.5
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Adapted from Exhibit 16.2
10
Control Loss
Is control
worthwhile?
Maybe, maybe
not.
Managers must
assess the regulation
costs and the cybernetic
feasibility.
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11
Control Methods
After reading these sections,
you should be able to:
2.
discuss the various methods that managers
can use to maintain control.
3.
describe the behaviors, processes, and outcomes
that today’s managers are choosing to control
their organizations.
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12
Control Methods
Bureaucratic
Normative
Objective
Concertive
Self-Control
2
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13
Bureaucratic Control


Top-down control

Use policies and rules to
control employees

Often inefficient and highly
resistant to change
Use rewards and
punishment to influence
employee behaviors
2.1
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14
Objective Control
Objective
Control
Use of observable measures of worker
behavior or outputs to assess
performance and influence behavior
Behavior
Control
Regulation of the behaviors and
actions that workers perform
on the job
Output
Control
Regulation of workers’ results or
outputs through rewards and
incentives
2.2
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15
Doing the Right Thing
Don’t Cheat on Travel Expense Reports
 Workers are often tempted to pad their travel
expense reports
 It’s often justified by feeling that they are entitled
 If you can’t trust an employee to be truthful
on an expense report, how can you trust them with
decisions involving millions of dollars?
2.2
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16
Effective Output Control
1.
Output control measures must be reliable, fair,
and accurate.
2.
Employees and managers must believe that
they can produce the desired results.
3.
The rewards or incentives tied to outcome
control measure must be dependent on
achieving established standards of
performance.
2.2
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17
Normative Control

Normative
Control
Created by:
 careful selection of employees
 observing experienced employees &
listening to stories about the company
2.3
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18
Concertive Control
Concertive
Control

Regulation of workers’ behavior and
decisions through work group values
and beliefs
Autonomous work groups
 operate without managers
 group members control processes, output,
and behaviors
2.4
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19
Self-Control





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
2.5
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20
What to Control?
Budgets,
Cash Flow,
EVA
Balanced
Scorecard
Customer
Defections
Quality
Waste and
Pollution
3
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21
The Balanced Scorecard
Customer
Perspective
Innovation and Learning
Perspective
Internal
Perspective
Financial
Perspective
3.1
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22
Advantages of the Balanced Scorecard
1.
Forces managers to set goals and measure
performance in each of the four areas
2.
Minimizes the chances of suboptimization
 performance improves in one area, but at
the expense of others
3.1
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23
The Balanced Scorecard:
Southwest Airlines
3.1
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24
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
Financial
ratios
3.2
Show what has happened to an
organization’s income, expenses,
and net profit over a period of time
Used to track liquidity, efficiency,
and profitability over time compared
to other businesses in its industry
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25
Basic Accounting Tools
Steps for a Basic Cash Flow Analysis
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
3.2
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Adapted from Exhibit 16.5
26
Basic Accounting Tools
Parts of a Basic Balance Sheet
3.2
1. Assets
• Current assets
• Fixed assets
2. Liabilities
• Current liabilities
• Long-term liabilities
3. Owner’s equity
• Stock
• Additional paid in capital
• Retained earnings
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Adapted from Exhibit 16.5
27
Basic Accounting Tools
Basic Income Statement
3.2
+
=
=
=
=
=
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
Chapter 16
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Adapted from Exhibit 16.5
28
Financial Ratios
LIQUIDITY RATIOS
LEVERAGE RATIOS
Current Ratio
Debt to Equity
Quick (Acid Test) Ratio
Debt Coverage
EFFICIENCY RATIOS
PROFITABILITY RATIOS
Inventory Turnover
Gross Profit Margin
Average Collections
Period
Return on Equity
3.2
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Adapted from Exhibit 16.6
29
Common Kinds of Budgets
3.2
Revenue
Budgets
Used to project or forecast
future sales
Expense
Budgets
Used to determine spending on
supplies, projects, or activities
Profit
Budgets
Used by profit centers, which have
“profit and loss” responsibility
Cash
Budgets
Used to forecast the cash a
company will have for expenses
Capital Expenditure
Budgets
Used to forecast large,
long-lasting investments
Variable Budgets
Used to project costs across
varying levels of sales/revenues
Chapter 16
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Adapted from Exhibit 16.7
30
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
3.2
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31
Economic Value Added (EVA)
1. Calculate net operating
profit after tax
$3,500,000
2. Identify how much capital
the company has invested
$16,800,000
3. Determine the cost paid
for capital
10%
4. Multiply capital used (step 2)
times cost of capital (step 3)
(10% x $16,800,000) =
$1,680,000
5. Subtract total dollar cost of
capital from net profit after
taxes
$3,500,000 net profit
-$1,680,000 cost of capital
$1,820,000 EVA
3.2
Chapter 16
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Adapted from Exhibit16.8
32
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

Encourages managers
and workers to be
creative in looking for
ways to improve
EVA performance
3.2
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33
The Customer Perspective
Controlling Customer Defections

Monitoring customer defections:
 identify which customers are leaving the
company
 measuring the rate at which they are leaving
3.3

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
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34
The Internal Perspective
Controlling Quality
Excellence
Value
Conformance to Expectations
3.4
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35
The Internal Perspective
Controlling Quality
3.4
Chapter 16
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Exhibit 16.12
36
Controlling Waste and Pollution
Good housekeeping
Material/product substitution
Process modification
3.5
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37
Controlling Waste and Pollution
Waste
Prevention
& Reduction
Recycle & Reuse
Waste Treatment
Waste Disposal
3.5
Chapter 16
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Adapted from Exhibit 16.13
38