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Bateman
Snell
Management
Competing
in the
New Era
5th
Edition
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Part Five
Chapter 16 - Managerial Control
Chapter Outline
Bureaucratic Control Systems
The Other Controls: Markets and Clans
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
After
studying Chapter 16, you will know:
 why
companies develop control systems for employees
 how to design a basic bureaucratic control system
 the purpose for using budgets as a control device
 how to interpret financial ratios and other financial controls
 the procedures for implementing effective control systems
 the different ways that market control mechanisms are used
by organizations
 how clan control can be approached in an empowered
organization
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Introduction
Control
 process
of measuring progress toward planned performance
and applying corrective measures to ensure that performance
is in line with managers’ objectives
 planning and controlling are interdependent
effective
planning facilitates control
control facilitates planning
 three
broad strategies for organizational control
bureaucratic
- use of rules, regulations, and formal authority
market - use of pricing mechanisms to regulate activities
clan - employees share organizational values and act in
accordance with them
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Leadership Symptoms Of An OutOf-Control Company
Misplaced confidence
Blame deflection
Avoidance
An eye to the past
Blind optimism
Setting a poor example
Isolation
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Bureaucratic Control Systems
The
control cycle
 Step
1: Setting performance standards
standard
- expected performance for a given goal
target that establishes a desired performance level, motivates
performance, and serves as a benchmark against which actual
performance is assessed
 can be set for any activity
 typically is derived from job requirements
 set with respect to quantity, quality, time, and cost

 Step
2: Measuring performance
performance
data obtained from three sources
written reports
 oral reports

personal observation
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Bureaucratic Control Systems
(cont.)
The
control cycle (cont.)
 Step
3: Comparing performance with the standard
evaluation
of the performance
for some activities, small deviations from the standard are
acceptable
for other activities, a slight deviation may be serious
 principle of exception - control is enhanced by concentrating on
the significant deviations from the standard
 only exceptional cases require corrective action

 Step
4: Taking corrective action
ensures
that operations are adjusted where necessary
type of corrective action depends on the nature of the problem

specialist control
operator control
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The Control Process
Set
performance
standards
Measure
performance
Take
corrective
action
Compare
Determine
deviation
Standards
Within
limits
No
Yes
Continue
work
progress
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Bureaucratic Control Systems
(cont.)
Approaches
to bureaucratic control
 Feedforward
(preliminary) control - control process used
before operations begin
future
oriented
prevent problems before they occur
includes policies, procedures, and rules
 Concurrent
control - control process used while plans are
being carried out
the
heart of any control system
includes directing, monitoring, and fine-tuning activities as they
are performed
advances in information technology have created powerful
concurrent controls
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Bureaucratic Control Systems
(cont.)
Approaches
to bureaucratic control (cont.)
 Feedback
control - control that focuses on the use of
information about previous results to correct deviations from
the acceptable standard
implies
that performance data were gathered and analyzed
results used to make corrections
timing is an important aspect of feedback control
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Bureaucratic Control Systems
(cont.)
Management
audits
 evaluation
of the effectiveness and efficiency of various
systems within an organization
 External audit - evaluation conducted by one organization,
such as a CPA firm, on another
may
conduct external audit of a competitor for strategic
decision-making purposes
useful for feedback and feedforward control
audit - periodic assessment of a company’s own
planning, organizing, leading, and controlling processes
 Internal
assess
what the company has done for itself and its customers
reviews the company’s past, present, and future
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Bureaucratic Control System
(cont.)
Budgetary
control
 most
widely recognized and commonly used method of
managerial control
 budgeting - process of investigating what is being done and
comparing the results with the corresponding budget data
used
to verify accomplishments or remedy differences
 Fundamental
budgetary considerations - begin with an
estimate of sales and expected income
budgeting
information is supplied to the entire company or any
of its units
not confined to financial matters
budgets prepared for a definite time period
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Bureaucratic Control System
(cont.)
Budgetary
control (cont.)
 Fundamental
budgetary
budgetary considerations (cont.)
control proceeds through several stages
establishing expectancies - starts with the broad company plan and
sales estimates
 ends with budget approval and publication
 budgetary operations - find out what is being accomplished and
compare the results with expectancies
 taking corrective action (if necessary)

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Types Of Budgets
Sales
Master
(all major business
activities)
Cash
Budget
focuses
on:
Production
(expressed in
physical units)
Cost production
(compare costs
with sales price)
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Bureaucratic Control System
(cont.)
Accounting
audits
 procedures
used to verify accounting reports and statements
 performed by an outside firm of public accountants
Activity-based
costing (ABC)
 cost
accounting method that identifies streams of activity
 employees break down what they do to define basic activities
 total expenses computed by traditional accounting
 total amounts spread over the activities according to time
spent on each
 provides an accurate picture of how costs should be charged
 highlights where wasted activities are occurring
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How Dana Discovers What Its
True Costs Are
Old way
Salaries
$371,917
Fringes
$118,069
Supplies
$76,745
Fixed costs
$23,614
Total $590,345
Process sales orders
Source parts
New
Expedite supplier orders
way
Expedite internal processing
Receive supplier quality
Activity- Reissue purchase orders
Expedite customer orders
based
Schedule intracompany sales
costing
Request engineering change
Resolve problems
Schedule parts
$144,846
$136,320
$ 72,143
$ 49,945
$ 47,599
$ 45,235
$ 27,747
$ 17,768
$ 16,704
$ 16,648
$ 15,390
Total $590,345
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Bureaucratic Control System
(cont.)
Financial
controls
 Balance
sheet - report that shows the financial picture of a
company at a given time
itemizes:
assets - the values of various items the corporation owns
 liabilities - the amounts the corporation owes to various creditors
 stockholders’ equity - amount accruing the corporation’s owners

Assets = Liabilities + Stockholders’ equity
shows
trends over time
gives managers insight into overall performance
identifies areas which require adjustments
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Bureaucratic Control System
(cont.)
Financial
controls (cont.)
 Profit
and loss statement - itemized financial statement of
the income and expenses of a company’s operations
comparisons
of profits and losses can identify trouble areas
a common control for the enterprise as a whole

may be used at the division and department level
 Financial
ratios - indicate possible strengths and weaknesses
calculated
from selected items on the profit and loss statement
and the balance sheet
Liquidity ratios - indicate the ability to pay short-term debts

current ratio - indicates the extent to which short-term assets can
decline and still be adequate to pay short-term liabilities
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Comparative P&L Statements For
The
Years
Ending
June
30
Income:
Net sales
Dividends from investments
Other
Total
$253,218
480
1,741
255,439
$257,636
430
1,773
259,839
180,481
39,218
2,483
1,941
224,123
178,866
34,019
2,604
1,139
216,628
1,615
5,199
121*
802
7,495
Income before taxes
31,316
43,211
11,895*
Provision for taxes
3,300
9,500
6,200*
$28,016
$33,711
$5,695*
Deductions:
Cost of goods sold
Selling and administrative expenses
Interest expense
Other
Total
Net income
*Decrease
$ 4,418
50
32
4,400
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Bureaucratic Control System
(cont.)
Financial
controls (cont.)
 Financial
ratios (cont.)
Leverage
ratios - show the relative amount of funds in the
business supplied by creditors and shareholders

debt-equity ratio - indicates the company’s ability to meet its longterm financial obligations
ratios - indicate management’s ability to generate a
financial return on sales or investment
Profitability

 Using
return on investment (ROI) - ratio of profit to capital used
 rate of return from capital
financial ratios - can have negative consequences
management
myopia - focus on short-term earnings and profits
at the expense of longer-term strategic obligations
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Bureaucratic Control System
(cont.)
Downside
of bureaucratic control
 Rigid
bureaucratic behavior - acting in ways that make one
look good on the control system’s measures
may
result in rigid, inflexible behavior geared toward doing only
what the system requires
 Tactical
behavior - behavior aimed at “beating the system”
manipulate
or falsify performance data
concern about individual rather than organizational performance
 Resistance
to control - people don’t like being accountable
control
system can change expertise and power structures
control system can change the social structure
control system may be perceived as an invasion of privacy
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Bureaucratic Control System
(cont.)
Designing
effective control systems
 Establish
valid performance standards - most effective
standards expressed in quantitative terms
measures
are not easily faked or sabotaged
system incorporates all important aspects of performance
too many measures create overcontrol and employee resistance
have stated tolerance ranges
 Provide
adequate information - employees must understand
the importance and nature of the control system
people

need feedback about performance
enables them to correct deviations from the standards
information
should be accessible
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Bureaucratic Control System
(cont.)
Designing
effective control systems (cont.)
 Ensure
acceptability to employees - more likely to accept
systems that have useful performance standards
overcontrol
is not an issue
believe the standards are possible to achieve
emphasize positive behavior rather than focusing on controlling
negative behavior alone
standards are established participatively
 Use
multiple approaches
include
both financial and nonfinancial performance goals
incorporate aspects of feedforward, concurrent, and feedback
control
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The Other Controls: Markets And
Clans
Market
control
 involves
the use of economic forces and the pricing
mechanisms that accompany them
 where output from any organizational unit has value to
others, a price can be negotiated for its exchange
 as a market for these transactions becomes established:
price
becomes an indicator of the value of the product or service
price competition effectively controls performance
 Market
controls at the corporate level
used
to regulate independent business units
business units treated as competing profit centers
profit and loss data used to evaluate performance
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The Other Controls: Markets And
Clans (cont.)
Market
control
 Market
controls at the business unit level
regulates
exchange among departments and functions
transfer price - price charged by one unit in the organization for
a product or service that it supplies to another unit of the same
organization
provide natural incentives to keep costs down
 Market
controls at the individual level
market
rate is a good indicator of an employee’s potential worth
provide a natural incentive for employees to enhance their skills
boards of directors use market controls to manage CEOs

incentives on top of base salary
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Examples Of Market Control
CEO uses market
controls to evaluate
performance of business
unit heads
Business
unit
manager
CEO/
President
Business
unit
manager
Business
unit
manager
Managers use transfer
pricing to establish
values for internal
transactions among
units
Business
unit
manager
Market rates determine
the base wage/salary for
managers and employees
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The Other Controls: Markets And
Clans (cont.)
Clan
control: the role of empowerment and culture
 bureaucratic
and market controls are no longer sufficient
because:
employees’ jobs
have changed
the nature of management has changed
the employment relationship has changed
 empowerment
- has become a necessary aspect of a
manager’s repertoire of control
does
 clan
not mean giving up control
control - create relationships built on mutual respect
encourage
each individual to take responsibility for her/his job
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Management Control In An
Empowered Setting
1. Put control where the operation is
2. Use “real time” rather than after-the-fact controls
3. Rebuild the assumptions underlying management
control to build on trust rather than distrust
4. Move to control based on peer norms
5. Rebuild the incentive systems to reinforce
responsiveness and teamwork
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The Other Controls: Markets And
Clans (cont.)
Clan
control (cont.)
 Understanding
culture’s role in control
organization
culture - set of important assumptions about the
organization and its goals and practices that members of the
company share
strong culture - everyone understands and believes in the firms’
goals, priorities, and practices
 weak culture - different people hold different values
 confusion about corporate goals

 Diagnosing
culture - clues about culture
corporate mission statements and official goals
 business practices
 symbols, rites and ceremonies
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 the stories people tell

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Competing Values Model Of
Culture
Flexible
Processes
Group
Adhocracy
External
Positioning
Internal
Maintenance
Hierarchy
Rational
Control-Oriented
Processes
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The Other Controls: Markets And
Clans (cont.)
Clan
control (cont.)
 Diagnosing
culture (cont.)
 general cultures can be categorized
Group
Culture
Dominant Attribute: cohesiveness, participation, teamwork, sense
of family
 Leadership Style: mentor, facilitator, parent-figure
 Bonding: loyalty, tradition, interpersonal cohesion
 Strategic Emphasis: toward developing human resources,
commitment, and morale

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The Other Controls: Markets And
Clans (cont.)
Clan
control (cont.)
 Diagnosing
culture (cont.)
Adhocracy
Dominant Attribute: entrepreneurship, creativity, adaptability,
dynamism
 Leadership Style: innovator, entrepreneur, risk taker
 Bonding: flexibility, risk, entrepreneur
 Strategic Emphasis: toward innovation, growth, new resources

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The Other Controls: Markets And
Clans (cont.)
Clan
control (cont.)
 Diagnosing
culture (cont.)
Hierarchy
Dominant Attribute: order, rules and regulations, uniformity,
efficiency
 Leadership Style: coordinator, organizer, administrator
 Bonding: rules, policies and procedures, clear expectations
 Strategic Emphasis: toward stability, predictability, smooth

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The Other Controls: Markets And
Clans (cont.)
Clan
control (cont.)
 Diagnosing
culture (cont.)
Rational
Dominant Attribute: goal achievement, environment exchange,
competitiveness
 Leadership Style: production and achievement-oriented, decisive
 Bonding: goal orientation, production, competition
 Strategic Emphasis: toward competitive advantage and market
superiority

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The Other Controls: Markets And
Clans (cont.)
Clan
control (cont.)
 Managing
culture to reinforce clan control
approaches
to managing culture
corporate leadership should espouse lofty ideals and visions for the
company
 executives must be attentive to the details of daily affairs
 top management must behave appropriately during moments of
truth when hard choices have to be made
 top management must celebrate and reward those who exemplify
the new values

clan
control is a “double edged sword”
takes a long time to develop and even longer to change
 employees must unlearn old values and embrace the new

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