Chapter 16
Control
MGMT3
Chuck Williams
Designed & Prepared by
B-books, Ltd.
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Copyright ©2011 by Cengage Learning. All rights reserved
Basics of Control
After reading this section,
you should be able to:
1. describe the basic control process.
2
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The Control Process
Begins by establishing clear
standards of performance
Involves comparing 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
3
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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
4
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Corrective Action
•
Identify performance
deviations
Identify
•
Analyze those
deviations
•
Develop and
implement programs
to correct them
Correct
1.3
Control
Process
Analyz
e
5
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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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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
7
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Feedforward Control
Guidelines for Using Feedforward Control
1. Plan and analyze thoroughly.
2. Be discriminating as you select input variables.
3. Keep the feedforward system dynamic. Don’t let it
become a matter of habit.
4. Develop a model of the control system.
5. Collect data on input variables regularly.
6. Assess data on input variables regularly.
7. Take action on what you learn.
1.5
8
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Control Loss
Is control
worthwhile?
Maybe,
maybe not.
Managers must
assess the regulation
costs and the cybernetic
feasibility.
9
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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.
10
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Control Methods
Bureaucratic
Normative
Objective
Concertive
Self-Control
2
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Bureaucratic Control
• Top-down control
• Use rewards and
punishment to influence
employee behaviors
• Use policies and rules to
control employees
• Often inefficient and highly
resistant to change
2.1
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Adding Control from
the Top
Beyond the Book
When current CEO Paul Hanrahan first joined
energy provider AES, an executive told him, “We
don’t have procedures…use your common sense.”
For years, the decentralized structure and
entrepreneurial atmosphere helped drive AES to
rapid growth and success. In 2002, however, a
liquidity crisis involving short term debt and lax
accounting standards almost sunk the company.
While much of the freedom and experimentation
remains, Hanrahan has added some structure as
well. New finance, human resources, and business
development divisions were established. And in
2008, AES’s accounting practices were finally
brought into compliance with the Sarbanes-Oxley
Act.
Source: M. Gunther, “A Powerful Comeback”, Fortune, 26 October 2009. 110-112.
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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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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.
2.2
3. The rewards or incentives tied to outcome
control measure must be dependent on
achieving established standards of
performance.
15
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Normative Control
Created by:
Normative
Control
– careful selection of employees
– observing experienced employees &
listening to stories about the company
2.3
16
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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
17
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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
18
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What to Control?
Budgets,
Cash Flow,
EVA
Balanced
Scorecard
Customer
Defections
Quality
Waste and
Pollution
3
19
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The Balanced Scorecard
Customer
Perspective
Innovation and Learning
Perspective
Internal
Perspective
Financial
Perspective
3.1
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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 at the
expense of others
3.1
21
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© Image100/Jupiterimages
The Balanced Scorecard:
Southwest Airlines
3.1
Sources: G. Anthes, “ROI Guide: Balanced Scorecard,” Computer World, 17 February 2003, available online at http://www.computerworld.com/action/
article.do?command=viewArticleBasic&articleId=78512&intsrc=article_pots_bot [accessed 5 September 2008].
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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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Beyond the Book
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
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Beyond the Book
Basic Accounting Tools
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
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Beyond the Book
Basic Accounting Tools
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
26
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Financial Ratios
Beyond the Book
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
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Beyond the Book
Common Kinds of Budgets
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
3.2
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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
29
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Economic Value Added (EVA)
1. Calculate net operating
profit after tax (NOPAT)
$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
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Big Results from Little
Changes
Beyond the Book
Small changes to a process can have
significant results, especially in large
companies like Home Depot. In trying to
find new ways to cut back on expenses,
Home Depot decided to change the brand
of the coffee they served at their help desk
for professional contractors (note: they
didn’t eliminate the coffee entirely). They
managed to save $500,000. Several
$500,000 changes can really add up.
Source: C. Tome, “C-Suite Strategies, The Colvin Interview: Renovating Home Depot”, interview by G. Colvin, Fortune, 31 August 2009. 45-50.
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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
32
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Beyond the Book
Cost-Cutting Guidelines
Here are some guidelines for cost-cutting:
1. Instead of implementing one-off cost-cuts, examine the entire
process involved in a job and ask how it can be made more
efficient.
2. Try bartering with other companies. Exchange low margin
cost products for things that you would normally pay cash for.
3. Offer to split the savings with employees.
4. Reducing expenses at the cost of quality can have adverse
effects.
5. Leasing as opposed to buying equipment can reduce costs
and have tax benefits.
6. Establish contract terms with your distributors that allow you
to renegotiate prices annually.
Source: T. Meyers, “frugal is back”, Entrepreneur, March 2009. 49-51.
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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 ten times as
much as keeping a current one
• Customers who have left are likely to tell you
what you are doing wrong
3.3
• Understanding why a customer leaves can help
fix problems and make changes
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The Internal Perspective
Controlling Quality
Excellence
Value
Conformance to Expectations
3.4
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The Internal Perspective
Controlling Quality
3.4
36
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Controlling Waste and Pollution
Good housekeeping
Material/product substitution
Process modification
3.5
37
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Controlling Waste and
Pollution
Waste
Prevention
& Reduction
Recycle & Reuse
Waste Treatment
Waste Disposal
3.5
38
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