Essentials of
Contemporary
Management
Chapter
8
Organizing: Control and Culture
PowerPoint Presentation by Charlie Cook
© Copyright The McGraw-Hill Companies, Inc., 2004. All rights reserved.
Learning Objectives
• After studying the chapter, you should be able to:
Define organizational control, and describe the four
steps of the control process.
Identify the main output controls, and discuss their
advantages and disadvantages as means of
coordinating and motivating employees.
Identify the main behavior controls, and discuss
their advantages and disadvantages as means of
coordinating and motivating employees.
Explain the role of organizational culture in
creating an effective organizational architecture.
© Copyright 2004 McGraw-Hill. All rights reserved.
8–2
What Is Control?
• Controlling
The process whereby managers monitor and
regulate how efficiently and effectively an
organization and its members are performing the
activities necessary to achieve organizational goals.
Involves monitoring and evaluating organizational
strategy and structure to assess whether there is a
need for change to improve the firm’s competitive
performance.
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8–3
Organizational Control
• Managers must monitor and evaluate:
Is the firm efficiently converting inputs into outputs?
• Are units of inputs and outputs measured
accurately?
Is product quality improving?
• Is the firm’s quality competitive with other firms?
Are employees responsive to customers?
• Are customers satisfied with the services offered?
Are our managers innovative in outlook?
• Does the control system encourage risk-taking?
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8–4
Control Systems and IT
• Control Systems
Formal, target-setting, monitoring, evaluation and
feedback systems that provide managers with
information about how well the organization’s
strategy and structure are working.
A good control system should:
• Be flexible so managers can respond as needed.
• Provide accurate information about the
organization.
• Provide information in a timely manner.
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8–5
Three Types of Control
Figure 10.1
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8–6
Types of Control
• Feedforward Controls
Used in the input stage of the process.
• Anticipates problems before they arise.
• Example: Giving rigorous specifications to
suppliers to avoid quality problems with inputs.
• Concurrent Controls
Give immediate feedback on how inputs are
converted into outputs.
• Allows correction of problems as they arise
• Managers can see that a machine is becoming
out of alignment and adjust/fix it.
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8–7
Types of Control (cont’d)
• 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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8–8
Control Process Steps
Figure 8.2
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8–9
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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8–10
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.
Concentration vs. Luck
Enthusiastic vs. unexpected
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8–11
The Control Process
3. Compare actual performance against chosen
standards.
Managers must decide if performance actually
deviates, often, several problems combine
creating low performance.
Reward or punishment
4. Evaluate result and take corrective action.
Standards have been set too high or too low.
Workers may need additional training or
Compensation!
equipment.
• This step is often hard since the environment is
constantly changing.
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8–12
Three Organizational Control Systems
Feedback
control
Feedforward
& concurrent
control
Social
control
Figure 8.3
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8–13
Financial Measures of Performance
• Financial Controls
Profit ratios
• How efficiently managers convert resources into
profits—return on investment (ROI).
Liquidity ratios
• How well managers protect resources to meet
short term debt—current and quick ratios.
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8–14
Financial Performance Measures
Profit Ratios
Net profit before taxes
Return on investment 
Total assets
Sales revenues - cost of goods sold
Gross profit margin 
Sales revenues
Liquidity Ratios
Current assets
Current ratio 
Current liabilitie s
Current assets - inventory
Quick ratio 
Current liabilities
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8–15
Financial Measures… (cont’d)
• Financial Controls (cont’d)
Leverage ratios
• How much debt is used to finance operations—
debt-to-asset and times-covered ratios.
Activity ratios
• How efficiently managers are creating value from
assets—inventory turnover, days sales
outstanding ratios.
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8–16
Financial Performance Measures (cont’d)
Leverage Ratios
Total debts
Debts - to - assets ratio 
Total assets
Profit before interest and taxes
Times - covered ratio 
Total interest charges
Activity Ratios
Cost of goods sold
Inventory turnover 
Inventory
Accounts receivable
Days sales outstanding 
Total Sales
300
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8–17
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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8–18
Organization-Wide Goal Setting
Figure 10.4
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8–19
Output Control (cont’d)
• Operating Budgets
Blueprints that 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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8–20
Problems with Output Control
• Managers must create output standards that
motivate at all levels.
They must be careful not to create short-term goals
that motivate managers to ignore the future.
• Example: Cutting costs by curtailing research and
development (R&D) now may lead to a loss of
competitiveness in the future.
If standards are set too high, workers may engage
unethical behaviors to attain them.
• Example: Attempting to increase output regardless of
product quality issues caused by omitting steps in
the production process.
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8–21
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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8–22
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.
• Pay raises and promotions are tied to goal
attainment.
• Teams are also measured with goals and
performance measured for the team.
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8–23
Rules and Standard Operating Procedures
• 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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8–24
Rules and Standard Operating Procedures
(cont’d)
• 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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8–25
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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8–26
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,
pride taken in work.
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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8–27
Factors Creating A Strong Organizational Culture
Figure 8.5
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8–28
Values and Norms
• Values
Beliefs and ideas about the kinds of goals members
of a society should pursue and about the kinds and
modes of behavior people should use to achieve
those goals.
• Norms
Unwritten, informal rules or guidelines that
prescribe appropriate behavior in particular
situations.
• Having norms and values that are suited to the
organization’s environment is important.
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8–29
Creating Organizational Culture
• Values of the Founder
Initial values are critical as founders hire their
first set of managers.
• Founders are likely hire those who share their
vision which evolves eventually into the culture
of the firm.
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8–30
Creating Organizational Culture (cont’d)
• Socialization
Organizational Socialization
• The process by which newcomers learn an
organization’s values and norms and acquire the work
behaviors necessary to perform jobs effectively.
• Newcomers learn not only because “they have to” but
because they want to in order to “fit in.”
• Organizational behavior, expectations, and
background are included in socialization.
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8–31
Creating Organizational Culture (cont’d)
• Ceremonies and Rites
Formal events that focus on important incidents:
• Rite of passage: denoting employees’ entrance into
the firm with the formal presentation of a name
badge.
• Rite of integration: building common bonds with
annual office parties and outings or celebrations for
meeting organizational performance goals.
• Rites of enhancement: enhancing worker
commitment to values through promotion
ceremonies and awards dinners.
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8–32
Creating Organizational Culture (cont’d)
• Stories and Language
Organizations repeat the stories of founders or
significant events in the firm’s history to
communicate the values and norms for behaviors
that are valued by the organization.
• Show workers how to act and what to avoid.
• Stories often have a hero that workers can mimic.
• Many firms have unique dress codes and use
jargon in their internal communications that only
their employees understand.
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8–33
Culture and Managerial Action
• Innovative Culture affects the functions of
management.
Planning
• In innovative firms, the culture will encourage all
managers to participate.
• In slow moving firms, the focus will be on the
formal process rather than the decision.
Organizing
• Creative firms have organic, flexible structures
that are most likely very flat with delegated,
decentralized authority.
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8–34
Culture and Managerial Action (cont’d)
• Culture affects the functions of management
(cont’d)
Leading
• Flexible, open organizations encourage leading
by example; top managers take risks and trust
lower managers.
Controlling
• Innovative firms choose types of controls that
match their structure and foster new ideas and
organizational cooperation.
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8–35
Homework 7
• GM’ new Saturn automobile line was a
completely new design that was built by a
specially-recruited workforce in a new factory.
• To market the new car, GM set up separate
dealerships and announced the sales people
in these organizations would not be paid on a
commission basis, as is common in the
industry. Instead, they were to be salaried.
• Why should GM do so? What might be the
advantage of this pay policy?
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8–36