Organizational Control
Chapter
14
1
Organizational Control
 Managers
monitor and regulate how
efficiently and effectively an
organization and its members are
performing the activities necessary to
achieve organizational goals

Keeping an organization on track,
anticipating events, changing the
organization to respond to opportunities
and threats
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Importance of organizational control
Managers must monitor and evaluate:

Is the firm efficiently converting inputs into
outputs?


Is product quality improving?


Is the firm’s quality competitive with other firms?
Are employees responsive to customers?


Are units of inputs and outputs measured accurately?
Are customers satisfied with the services offered?
Are our managers innovative in outlook?

Does the control system encourage risk-taking?
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Three Types of Control
Figure 11.1
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Types of Control
 Feedforward

Controls
Used in the input stage of the process
 Managers can anticipate problems before they
arise.
 Managers can give rigorous specifications to
suppliers to avoid quality problems with inputs.
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Types of Control
 Concurrent

Controls
Give immediate feedback on how inputs are
converted into outputs
Allows managers to correct problems as they arise
 Managers can see that a machine is becoming out of
alignment and fix it.

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Types of Control
Feedback Controls

Provide after-the-fact information managers
can use in the future

Customers’ reactions to products are used to
take corrective action in the future.
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Control Process Steps
Figure 11.2
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The Control Process
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The Control Process
1. Establish standards, goals, or targets
against which performance is to be
evaluated.


Managers at each organizational level
need to set their own standards.
Standards must be consistent with the
organization’s strategy (i.e., for a low cost
strategy, standards should be focused
closely on reducing costs).
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The Control Process
2. Measure actual performance

Managers can measure outputs resulting
from worker behavior or they can
measure the behavior themselves.
 The
more non-routine the task, the harder it is
to measure performance or output, causing
managers to measure an employee’s behavior
(e.g., that an employee comes to work on time)
rather than the employee’s output.
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The Control Process
3. Compare actual performance against
chosen standards.

Managers must decide if performance actually
deviates; often, several problems combine
creating low performance.
4. Evaluate result and take corrective action.


Standards have been set too high or too low.
Workers may need additional training or
equipment.
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Three Organizational Control Systems
Figure 11.3
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Financial Measures of Performance
Financial Controls

Profit ratios


Measures of how efficiently
managers convert resources
into profits
—return on investment (ROI).
Liquidity ratios

Measures of how well managers protect
resources to meet short term debt—current and
quick ratios.
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Return on Investment
ROI = Net profit before taxes/Total
assets
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Quick Ratio

Quick Ratio = (Current assets –
Inventory) / Current liability
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Times Covered Ratio
Times covered ratio =
Profit before interest and taxes / total
interest charges

-Ratio less than 1, the organisation is
technically insolvent.
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Financial Measures of Performance
Financial Controls

Leverage ratios


Measures of how much debt is used to finance
operations—debt-to-asset and times-covered
ratios.
Activity ratios

Measures of how efficiently managers are
creating value from assets—inventory turnover,
days sales outstanding ratios.
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Inventory Turnover

Inventory Turnover =
Cost of good sold / Inventory
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Days sales outstanding
 Days
sales outstanding =
Current Accounts Receivable /
(Sales for period / Days in period)
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Summary of Financial Performance
 Profit
ratio: ROI, operating margin
 Liquidity ratio: current ratio, quick ratio
 Leverage ratio: debt-to-assets
ratio,Times-covered ratio
 Activity ratio: Inventory turnover, Days
sales outstanding.
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Output Control
Organizational Goals

Each division within the firm is given
specific goals that must be met in order to
attain overall organizational goals.
Goals should be specific and difficult, but not
impossible, to achieve (stretch goals).
 Goal setting and establishing output controls are
management skills that are developed over time.

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Output Control
Operating Budgets

Blueprints state how managers
intend to allocate and use the
resources they control to attain organizational
goals effectively and efficiently.


Each division is evaluated on its own budgets for cost,
revenue or profit.
Managers are evaluated by how well they meet goals for
controlling costs, generating revenues, or maximizing
profits while staying within their budgets.
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Problems with Output Control
Managers must create output standards
that motivate at all levels.


They must be careful not to create shortterm goals that motivate managers to
ignore the future.
If standards are set too high, workers may
engage unethical behaviors to attain them.
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Behavior Control
Direct Supervision

Managers who directly manage can teach, reward,
lead by example, and take corrective action as
needed.



Can be very expensive since only a few workers can be
personally managed by one manager and many
managers are needed.
Close supervision demotivates workers who desire less
scrutiny and more autonomy, causing them to avoid
responsibility.
Direct supervision is difficult to do effectively in complex
job settings.
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Management by Objectives
Management by Objectives (MBO)

A goal-setting process in which managers and
subordinates negotiate specific goals and
objectives for the subordinate to achieve and then
periodically evaluate their attainment of those
goals.




Specific goals are set at each level of the firm.
Goal setting is participatory with manager and worker
Periodic reviews of subordinates’ progress toward goals
are held (pay raises and promotions are tied to goal
attainment).
Teams are also measured in this way with goals and
performance measured for the team.
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Management by Objectives (MBO)
 The
steps are:
 (1) Establish specific goals and
objectives at each organizational level.
 (2) Determine subordinates' goals,
together with subordinates.
 (3) Periodically review subordinates'
progress toward goals with
subordinates.
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Bureaucratic Control
 Bureaucratic

Control
Control through a system of rules and standard
operating procedures (SOPs) that shapes the
behavior of divisions, functions, and individuals.



Rules and SOPs tell the worker what to do (standardized
actions) so outcomes are predictable.
There is still a need for output control to correct mistakes.
Bureaucratic control is best used for routine problems in
stable environments.
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Bureaucratic Control
Bureaucratic Control

Problems with Bureaucratic Control
Rules easier to make than than discarding them,
leading to bureaucratic “red tape” and slowing
organizational reaction times to problems.
 Firms become too standardized and lose
flexibility to learn, to create new ideas, and solve
to new problems.

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Organizational Culture
Organizational Culture

The set of internalized values, norms,
standards of behavior, and common
expectations that control the ways in which
individuals and groups in an organization
interact with each other and work to
achieve organizational goals.
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Clan Control
Clan Control


The control through the development of an internal
system of values and norms.
Both culture and clan control accept the norms and
values as their own and then work within them.



Examples: Work dress styles, normal working hours
These methods provide control where output and
behavioral control does not work.
Strong culture and clan control help worker to
focus on the organization and enhance its
performance.
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Values

beliefs and ideas about the kinds of
goals members of a society should
pursue and the kinds of behaviour they
should use to achieve these goals.
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Norms

are unwritten rules or guidelines that
prescribe appropriate behaviour in
particular situations.
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Transmitted by:1.
2.
Values of the Founder

Founder’s values and beliefs have
substantial influence.

Subordinates imitate the style of the
founder.
Socialization

Newcomers learn an organisation’s
values and norms and acquire the work
behaviour necessary to perform
effectively.
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3. Ceremonies and rites




formal events that recognize incidents of
importance to the organization and employees.
Rites of passage – determine how individuals
enter, advance within, or leave the organisation.
Rites of integration – build and reinforce
common bonds among organisational members.
Rites of enhancement – let organisations
publicly recognize and reward employees’
contribution.
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4. Stories and language



Stories (fact or fiction) about organisational
heroes and villains
Slang or jargon – specific words or
phrases.
Nonverbal language – such as how people
dress or the degree of formality used.
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