Pamela S. Lewis
Stephen H. Goodman
Patricia M. Fandt
Slides Prepared by
Bruce R. Barringer
University of Central Florida
©2001 South-Western College Publishing

Learning Objectives
Slide 1 of 3
1. Define and discuss the importance of organizational control.
2. Identify the sequence of steps to be undertaken in a thorough control system.
3. Identify the factors that are important considerations in the design of a control system.
4. Describe the various characteristics of effective control.
© 2001 South-Western Publishing Transparency 16-2

Learning Objectives
Slide 2 of 3
5. Identify the factors that help determine the proper amount of control.
6. Define feedforward control, concurrent control, and feedback control.
7. Describe the difference between the philosophies of bureaucratic control and organic control.
© 2001 South-Western Publishing Transparency 16-3

Learning Objectives
Slide 3 of 3
8. Describe some of the more important techniques and methods for establishing financial control.
9. Discuss some of the ethical issues related to the control of employee behavior.
© 2001 South-Western Publishing Transparency 16-4

Organizational Control Defined
The systematic process through which managers regulate organizational activities to make them consistent with the expectations established in plans and to help them achieve all predetermined standards of performance.
© 2001 South-Western Publishing Transparency 16-5

Process of Control
Slide 1 of 3
• Setting Standards for Performance
– Whenever possible, the standards should be set in a manner that allows them to be compared with actual performance.
• Measuring Actual Performance
– An organization must decide:
• What to measure.
• When to measure.
• How frequently to measure.
© 2001 South-Western Publishing Transparency 16-6

Process of Control
Slide 2 of 3
• Comparing Actual Performance With
Standards
– This step involves determining if actual performance compared to standards falls within acceptable limits.
• Responding to Deviations
– If the deviation from performance is unacceptable, then corrective action is warranted. If the deviation is acceptable, no correction action is necessary.
© 2001 South-Western Publishing Transparency 16-7

Process of Control
Slide 3 of 3
Set performance standards
Measure actual performance
Compare performance with standards
© 2001 South-Western Publishing
If deviations are acceptable
Take no corrective action
If deviations are unacceptable
Take corrective action
Transparency 16-8

Designing Quality and Effectiveness into the Control System
Factors to consider when designing a control system:
The amount of variety in the control system
The ability to anticipate problems
The sensitivity of the measuring device
The composition of the feedback reports
© 2001 South-Western Publishing Transparency 16-9

Design Factors Affecting Control
System Quality
Slide 1 of 3
• The Amount of Variety in the Control System
– Variety refers to the number of activities, processes, or items that are measured and controlled.
– Law of requisite variety
• Control systems must have enough variety to cope with the variety in the systems they are trying to control.
© 2001 South-Western Publishing Transparency 16-10

Design Factors Affecting Control
System Quality
Slide 2 of 3
• Ability to Anticipate Problems
– If a deviation can be anticipated before it occurs, corrective action can be instituted more quickly and the negative consequences of the deviation reduced.
• Sensitivity of the Measuring Device
– Care must be taken to use a device that is sensitive enough to adequately measure the system being controlled.
© 2001 South-Western Publishing Transparency 16-11

Design Factors Affecting Control
System Quality
Slide 3 of 3
• Composition of Feedback Reports
– Variance reporting
• Highlighting only those things that fail to meet the established standards.
– Management by exception
• Focusing on the elements that are not meeting the standards.
© 2001 South-Western Publishing Transparency 16-12

Control System Design Issues
Slide 1 of 2
Control Process Steps
Step 1: Set standards of performance
Design Considerations
Design factors
- Variety
- Anticipation
- Sensitivity
- Feedback reporting
Step 2: Measure actual performance
© 2001 South-Western Publishing
Effectiveness criteria
- Related to strategy
- Complete
- Use objective and subjective measures
- Timely
- Acceptable
Transparency 16-13

Control System Design Issues
Slide 2 of 2
Control Process Steps
Step 3: Compare performance with standards
Design Considerations
Select proper amount
- Cost
- Reliability
- Process importance
Step 4: Respond to deviations
© 2001 South-Western Publishing
Select focal point
- Feedforward focus
- Concurrent focus
- Feedback focus
- Multiple focus
Transparency 16-14

Criteria for Effective Control
Slide 1 of 3
• Is Related to Organizational Strategy
– A control system should measure what is important now and what will be important in the future.
• Utilizes All Steps in the Control Process
– To be effective, a control system must employ all of the steps in the control process.
© 2001 South-Western Publishing Transparency 16-15

Criteria for Effective Control
Slide 2 of 3
• Composed of Objective and Subjective
Measures
– Effective control systems typically require managers to blend quantitative (objective) and qualitative (subjective) performance measures.
• Incorporates Timeliness in Feedback
Reporting
– Timeliness is the degree to which the control system provides information when it is needed.
© 2001 South-Western Publishing Transparency 16-16

Criteria for Effective Control
Slide 3 of 3
• Acceptable to a Diverse Work Force
– To be effective, organizational controls must be accepted by employees.
– The control system should motivate workers to recognize standards and act to achieve them.
© 2001 South-Western Publishing Transparency 16-17

Selecting the Proper Amount of
Control
Slide 1 of 3
• Costs in the Control System
– Two basic categories of costs need to be considered:
• The costs associated with the information needed to perform the control process.
• The costs associated with undesirable deviations from standards.
© 2001 South-Western Publishing Transparency 16-18

Selecting the Proper Amount of
Control
Slide 2 of 3
• Reliability of the System
– Reliability refers to the probability that the object or process being controlled will consistently behave in an acceptable manner.
– The basic premise is that the more reliable the process, the less control that is needed.
© 2001 South-Western Publishing Transparency 16-19

Selecting the Proper Amount of
Control
Slide 3 of 3
• Importance of the Process Being Controlled
– The more important the object or process being controlled, the greater the amount of control that should be exercised.
© 2001 South-Western Publishing Transparency 16-20

Selecting the Focal Point for Control
Slide 1 of 2
• Feedforward (Preventive) Control
– Focuses on detecting undesirable material, financial, or human resources that serve as inputs to the transformation process.
• Concurrent Control
– Focuses on the transformation process to ensure that it is functioning properly.
© 2001 South-Western Publishing Transparency 16-21

Selecting the Focal Point for Control
Slide 2 of 2
• Feedback Control
– Focuses on discovering undesirable output and implementing corrective action.
• Multiple Focal Points
– Most organizations use several control systems focused on various phases of the transformation process.
© 2001 South-Western Publishing Transparency 16-22

Control Focal Points
Control system
Feedforward control
Inputs
Concurrent control
Transformation process
Feedback control
Outputs
© 2001 South-Western Publishing Transparency 16-23

Managerial Control Philosophies
Bureaucratic
Control
Use of formal mechanisms to influence behavior, assess performance, and correct unacceptable deviations from standards.
Organic Control
Reliance upon social values, traditions, shared beliefs, flexible authority, and trust to assess performance and correct unacceptable deviations.
© 2001 South-Western Publishing Transparency 16-24

Factors Favoring Bureaucratic vs.
Organic Controls
Bureaucratic
Control
Task-oriented management style
Culture favors decision making at the top
Employees that lack education and experience
Performance that can be quantified and measured
© 2001 South-Western Publishing
Organic Control
Relationship-oriented management style
Culture encourages employee participation
Highly educated, highly trained employees
Performance that is difficult to measure
Transparency 16-25

Mechanisms for Financial Control
Slide 1 of 3
• Financial Statements
– Balance sheet
• Summary of an organization’s financial position at a given point in time, showing assets, liabilities, and owner’s equity.
– Income statement
• Summary of an organization’s financial performance over a given time interval, showing revenues, expenses, and bottomline profit or loss.
© 2001 South-Western Publishing Transparency 16-26

Mechanisms for Financial Control
Slide 2 of 3
• Financial Ratios
– Liquidity ratios
• Indicators of the firm’s ability to meet its short-term debt obligations.
– Profitability ratios
• Indicators of the relative effectiveness, or profitability, of the organization.
© 2001 South-Western Publishing Transparency 16-27

Mechanisms for Financial Control
Slide 3 of 3
• Financial Ratios (cont.)
– Debt ratios
• Indicators of the firm’s ability to handle long-term debt.
– Activity ratios
• Indicators of performance with respect to key activities defined by management.
© 2001 South-Western Publishing Transparency 16-28

Ethical Issues in the Control of a
Diverse Work Force
• Drug Testing
• Undercover Surveillance
• Computer Monitoring
© 2001 South-Western Publishing Transparency 16-29

Guidelines for the Successful
Manager of the Future
Slide 1 of 4
• Develop a control system for each important product, service, process, or activity within the organization.
• Incorporate sufficient variety, sensitivity, anticipation capability, and feedback into the control system.
© 2001 South-Western Publishing Transparency 16-30

Guidelines for the Successful
Manager of the Future
Slide 2 of 4
• Gauge the control system’s effectiveness by considering its relationship to corporate strategy, its completeness, the degree to which it incorporates objective and subjective performance measures, its timeliness, and its acceptability to individuals within the organization.
© 2001 South-Western Publishing Transparency 16-31

Guidelines for the Successful
Manager of the Future
Slide 3 of 4
• Determine the appropriate points within the organization where control systems should be focused.
• Understand the intricacies of the financial data contained in the organization’s financial statements, and use various financial control techniques to assess the firm’s financial health.
© 2001 South-Western Publishing Transparency 16-32

Guidelines for the Successful
Manager of the Future
Slide 4 of 4
• Adopt a philosophy of control that is consistent with the management style, corporate culture, employee professionalism, and performance measures present within the organization.
© 2001 South-Western Publishing Transparency 16-33