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OVERVIEW OF THE CHAPTER
This chapter examines the nature of organizational control and describes the four steps of the
control process. It also discusses three types of systems available to managers to control and
influence organizational members: output control, behavior control, and organizational
culture(clan control). Effective management of organizational change is addressed, as well as
the role of the entrepreneur in the change process.
LEARNING OBJECTIVES




Define organizational control and identify the main output and behavior controls
managers use to coordinate and motivate employees. (LO1)
Explain the role of clan control or organizational culture in creating an effective
organizational architecture. (LO2)
Discuss the relationship between organizational control and change and explain why
managing change is a vital management task. (LO3)
Understand the role of entrepreneurship in the control and change process. (LO4)
MANAGEMENT SNAPSHOT: CONTROL IS NO LONGER A PROBLEM FOR
ORACLE
One of the main advantages of Internet-based control software is its ability to centralize
management of a company’s widespread operations, thereby allowing managers to easily
compare and contrast the performance of different divisions spread around the globe in real
time. Oracle, the second largest independent software company in the world after Microsoft,
did not have such a system in place and therefore was not experiencing the cost savings that
could result from it. Instead, Oracle’s financial and human resources information was located
on seventy different computing systems across the world.
Recognizing the irony of the situation, CEO Larry Ellison ordered the implementation of an
Internet-based control system as soon as possible. His goal was to have all of Oracle’s sales,
financial, and human resources information systems consolidated in two locations. This
information was to be made immediately available to all managers with one click of a mouse.
He also instructed that any paper-based control systems be immediately automated. Savings
resulted in over $1 billion a year.
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LECTURE OUTLINE
I. WHAT IS ORGANIZATIONAL CONTROL? (LO1)
Controlling is 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.

In controlling, managers monitor and evaluate whether their organization’s strategy
and structure are working as intended, how they could be improved, and how they
might be changed if they are not working.

Control involves keeping an organization on track and anticipating events that might
occur.

It is also involved with keeping employees motivated, focused upon important
problems facing the organization, and working together to take advantage of
opportunities.
The Importance of Organizational Control

A control system contains the measures or yardsticks that allow managers to assess
how efficiently the organization is producing goods and services. Without a control
system in place, managers have no idea how their organization is performing and how
its performance can be improved.

Organizational control is important in determining the quality of goods and services
because it gives managers feedback on product quality. Effective managers create a
control system that consistently monitors the quality of goods and services so that they
can make continuous improvements to quality.

By developing a control system to evaluate how well customer-contact employees are
performing their jobs, managers can make their organizations more responsive to
customers. Monitoring employee behavior can help managers find ways to increase
employees’ performance levels.

Controlling can raise the level of innovation in an organization by deciding on the
appropriate control systems to encourage risk taking.
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Control Systems and IT

An effective control system has three characteristics: 1) it is flexible enough to allow
managers to respond as necessary to unexpected events, 2) it provides accurate
information, and 3) it provides managers with the information in a timely manner.

New forms of IT have revolutionized control systems because they facilitate the flow
of accurate and timely information up and down the organizational hierarchy and
between functions and divisions.

Control systems are developed to measure performance at each stage in the conversion
of inputs into finished goods and services.
-
At the input stage, managers use feedforward control to anticipate
problems before they arise so that problems do not occur later, during the
conversion process. At this stage, IT can be used to keep in contact with
suppliers, monitor their progress, and control the quality of inputs received
from them.
-
At the conversion stage, concurrent control gives managers immediate
feedback on how efficiently inputs are being transformed into outputs.
Concurrent control through IT alerts managers to the need to react quickly
to the source of the problem. Concurrent control is at the heart of total
quality management programs.
-
At the output stage, managers use feedback control to provide information
about customers’ reactions to goods and services so that corrective action
can be taken if necessary.
The Control Process
The control system, whether at the input, conversion, or output stage, can be broken down
into four steps. They are:

Step 1: Establish the standard of performance, goals, or targets against which
performance is to be evaluated.

Step 2: Measure actual performance.

Step 3: Compare actual performance against chosen standards of performance.

Step 4: Evaluate the result and initiate corrective action if the standard is not being
achieved.
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OUTPUT CONTROL
All managers develop a system of output control for their organizations. The three main
mechanisms that managers use to assess output or performance are financial measures,
organizational goals, and operating budgets.
Financial Measures of Performance
Top managers use various financial measures to evaluate performance. The most common
financial measures are:

Profit ratios, which measures how efficiently managers are using the organization’s
resources to generate profits. Return on investment (ROI), which is an organization’s
net income before taxes divided by its total assets, is the most commonly used
financial profit ratio. Gross profit margin is the difference between the amount of
revenue generated and the resources used to produce the product. It provides
information about how efficiently an organization is using its resources. Both of these
profit ratios allow managers to assess its competitive advantage.

Liquidity ratios measure how well managers have protected organizational resources
so as to be able to meet short-term obligations. The current ratio (current assets
divided by current liabilities) tells managers whether they have the resources to meet
claims for short-term creditors. The quick ratio tells whether they can pay these claims
without selling inventory.

Leverage ratios such as the debt-to-assets ratio and the times-covered ratio measure
the degrees to which managers use debt or equity to finance ongoing operations.

Activity ratios provide measures of how well managers are creating value from assets.
Inventory turnover measures how efficiently managers are turning over inventory.
Days sales outstanding provide information on how efficiently managers are
collecting revenue from customers.
The objectivity of financial measures of performance is the reason why so many managers use
them to assess effectiveness and efficiency. When an organization fails to meet performance
standards, managers know that they must take corrective action.
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Management Insight: Making Financial Figures Come Alive
Some top managers, including Michael Dell, make a point of showing employees exactly how
their activities affect financial ratios. At his company’s boot camp for new employees, Dell
has been known to bring financial charts that show employees how each minute they devote
to performing a specific job activity, or how each mistake made is assembling or packaging a
PC, affects bottom line profitability. Dell does not care about how profits or sales grow
individually; he cares about how these two figures work together. For that reason, he places
heavy emphasis on operating margin ratios.

Financial information helps managers to evaluate past decisions, but does not tell them
how to find new opportunities to build competitive advantage. This is why
organizational goals are important.
Organizational Goals
 After top managers have set the organization’s overall goals, they then establish
performance standards for the various divisions and functions. These standards specify
for divisional and functional managers the level at which their units must perform if
the organization is to achieve its overall goals.

Divisional managers then develop a business- level strategy that they hope will allow
them to achieve that goal. In consultation with functional managers, they specify the
functional goals that managers of different functions need to achieve to allow the
division to achieve its goals.

In turn, functional managers establish goals that first-line managers and nonmanagerial employees need to achieve to allow the function to achieve its goals.

It is vital that the goals set at each level harmonize with the goals set at other levels.
Also, goals should be set appropriately so that managers are motivated to accomplish
them. The best goals are specific difficult goals, often called stretch goals, that will
challenge and managers’ ability but are not out of reach.
.
Operating Budgets
 The next step in developing an output control system is to establish operating budgets.
An operating budget is a blueprint that states how managers intend to use
organizational resources to achieve organizational goals efficiently.

Managers at one level allocate to subordinate managers a specific amount of resources
to use to produce goods and services. These lower-level managers are evaluated on
their ability to stay within the budget and to make the best use of resources.
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
Large organizations often treat each division as a stand-alone responsibility center,
and then evaluate each division’s contribution to corporate performance.
-
Managers may be given a fixed budget and evaluated for the amount of
goods or services they can produce from it (a cost or expense budget
approach).
-
Or managers may be asked to maximize the revenues from the sales of
goods and services produced (a revenue budget approach).
-
Or they may be evaluated on the difference between the revenues
generated and the budgeted cost of making those goods and services (a
profit budget approach).
Problems with Output Control
Managers must be careful that the output standards they create do not cause managers at
lower levels to behave in inappropriate ways to achieve organizational goals. Output
standards should encourage managers to be most concerned about the long term.
Problems With Output Control

When designing an output control system, managers must be sure that the output
standards they create motivate managers at all levels and do not encourage
inappropriate behavior as a way to achieve organizational goals.

Managers primary concern should be long-term effectiveness. Therefore, if
conditions change, it is probably better that top managers communicate to those lower
in the hierarchy that they are aware of the changes taking place and are willing to
revise and lower goals and standards.

Managers must be sensitive to how they use output control and constantly monitor its
effects at all levels in the organization. Output controls should serve as a guide to
appropriate action.
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BEHAVIOR CONTROL
Behavior control, along with output control, is a method of motivating employees. There are
three mechanisms of behavior control that managers can use: direct supervision, management
by objectives, and rules and standard operating procedures.
Direct Supervision

The most immediate and potent form of behavior control is direct supervision by
managers. Under direct supervision, managers actively monitor and observe, teach,
and correct subordinates. Direct supervision requires that managers lead by example
and can be a very effective way of motivating employees.

Problems are associated with direct supervision include:
-
It is very expensive because a manager can personally manage only a small
number of subordinates effectively. For this reason, output control is usually
preferred over behavior control.
-
Direct supervision can demotivate subordinates if they feel that they are not
free to make their own decisions.
-
For many jobs direct supervision is not feasible. The more complex a job, the
more difficult it is for a manager to determine how well an employee is
performing.
Management by Objectives
To provide a framework within which to evaluate subordinates’ behavior, many organizations
implement some version of management by objectives (MBO). Management by objectives is a
system of evaluating subordinates for their ability to achieve specific organizational goals or
performance standards and to meet operating budgets. It involves three steps.

Step 1: Specific goals and objectives are established at each level of the organization.

Step 2: Managers and their subordinates together determine the subordinates’ goals.

Step 3: Managers and their subordinates periodically review the subordinates’
progress toward meeting goals.
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In companies in which responsibilities have been decentralized to empowered teams, MBO
works somewhat differently. Managers as each team to develop a set of goals and
performance targets that the team hopes to achieve. Managers then negotiate with each team
to establish its final goals and the budget the team will need to achieve them. Rewards are
linked to team performance, not to the performance of any one team member.
Bureaucratic Control
When direct supervision is too expensive and MBO is inappropriate, managers may use
bureaucratic control. Bureaucratic control is control of behavior by means of a
comprehensive system of rules and standard operating procedures (SOPs) that shape and
regulate the behavior of divisions, functions, and individuals.

Rules and SOPs guide behavior and specify what employees are to do when they
confront a problem. It is the responsibility of a manager to develop rules that allow
employees to perform their activities efficiently and effectively.

When employees follow the rules, their behavior is standardized—actions are
performed in the same way time and time again. There is no need to monitor the
outputs of behavior because standardized behavior leads to standardized outputs.
Problems with Bureaucratic Control
With a bureaucratic control system in place, managers can manage by exception and intervene
and take corrective action only necessary. However, the following problems have been
associated with bureaucratic control, which can reduce organizational effectiveness. They
are:
 Establishing rules is always easier than discarding them. If the amount of ‘red tape’
becomes onerous, sluggishness can imperil an organization’s survival.

Because rules constrain and standardize behavior, there is a danger that people become
so used to automatically following rules that they stop thinking for themselves.
Innovation is incompatible with the use of extensive bureaucratic control.

Bureaucratic control is most useful when organizational activities are routine and
when employees are making programmed decisions. It is less useful where
nonprogrammed decisions have to be made and managers have to react quickly to
changes.
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For many of the most significant organizational activities, output control and behavior control
are inappropriate, for the following reasons:
 A manager cannot evaluate the performance of workers such as doctors, research
scientists, or engineers by observing their behavior on a day-to-day basis.

Rules and SOPs are of little use in telling a doctor how to respond to an emergency
situation or a scientist how to discover something new.

Output controls such as the amount of time a surgeon takes for each operation or the
costs of making a discovery are very crude measure of the quality of performance.
II. ORGANIZATIONAL CULTURE AND CLAN CONTROL (LO2)
Organizational culture is another control system that regulates and governs employee
attitudes and behavior. It is the shared set of beliefs, expectations, values, norms, and work
routines that influence how members of an organization relate to each other and work together
to achieve organizational goals.

Clan control is the control exerted on individuals and groups in an organization by
shared values, norms, standards of behavior, and expectations. Organizational culture
is not an externally imposed system; rather, employees internalize organizational
values and norms. Rather, employees internalize organizational values and norms, and
then let these values and norms guide their decisions and actions.

Organizational culture is an important source of control for two reasons: 1) it makes
control possible in situations where managers cannot use output or behavior control,
and 2) when a strong and cohesive set of organizational values and norms is in place,
employees focus on thinking about what is best for the organization in the long run.
Manager as a Person: James Casey Creates a Culture for UPS
UPS employs over 250,000 people and is the most profitable company in its industry. Since
its founding in 1907 by James E. Casey, UPS has developed a culture that has been a model
for competitors, such as FedEx and the U.S. Postal Service. From the beginning, Casey made
efficiency and economy the company’s driving values. Loyalty, humility, discipline,
dependability, and intense effort were established as the key norms and standards UPS
employees should adopt. UPS has always gone to extraordinary lengths to develop and
maintain these values and norms in its workforce.
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The company’s operating systems are subject to intense scrutiny by the company’s 3,000
industrial engineers, who are constantly on the lookout for ways to measure outputs and
behaviors to improve efficiency. For example, they time every part of the truck drivers’ job,
and as a result, truck drivers are instructed with extraordinary detail on how to perform each
component of their job. Its search to find the best set of output controls leads UPS to
constantly develop and introduce the latest in IT into the company’s operations, particularly in
materials management. UPS also offers a consulting service to other companies in the area of
global supply chain management to teach other companies how to pursue its values of
efficiency and economy.
Adaptive and Inert Cultures
Many researchers and managers believe that employees of organizations go out of their way
to help their organization because the organization has a strong and cohesive organizational
culture, i.e., an adaptive culture.
 Adaptive cultures are those whose values and norms that help an organization to build
momentum, grow, and change as needed to achieve its goals and be effective.

In contrast, inert cultures are those that lead to values and norms that fail to motivate
or inspire employees. They lead to stagnation and often failure over time.

Researchers have found that organizations with strong adaptive cultures invest in their
employees and demonstrate their commitment to them. An example of such
investment and commitment is emphasizing the long-term nature of the employment
relationship, trying to avoid layoffs, developing long-term career paths for employees,
and investing heavily in training and development to increase employee value to the
organization. Also, employee rewards are linked directly to employee and
organizational performance.

Other organizations, however, develop cultures with values that do not reflect a
commitment to protecting and increasing the worth of their human resources. In a
company with an inert culture, poor working relationships frequently develop between
the organization and its employees. Instrumental values of non-cooperation, laziness,
and loafing are prevalent and work norms of output restriction are common.
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
An adaptive culture develops an emphasis on entrepreneurship, respect for employees,
and uses an organizational structure that empowers employees and motivates them to
succeed. In contrast, in an inert culture, employees are content to be told what to do
and have little incentive or motivation to perform beyond minimum work
requirements.
III. ORGANIZATIONAL CHANGE (LO3)
There is a fundamental need to balance two opposing forces in the control process. On one
hand, adopting the right set of output and behavior controls is essential for improving
efficiency. One the other hand, however, employees also need to feel that they have the
autonomy to depart from routines as necessary to increase effectiveness because the
environment is dynamic and uncertain.

Many researchers believe that the highest performing organizations are those that are
constantly changing and thus have become experienced at it. For this reason, it is vital
that managers develop the skills necessary to mange change effectively. Several
experts have proposed a model that managers can follow to implement change
successfully.

Organizational change is the movement of an organization away from its present
state and toward some desired future state to increase its efficiency and effectiveness.
Assessing the Need for Change

Organizational change can affect practically all aspects of organizational functioning,
including organization structure, culture, strategies, control systems, and groups and
teams, human resource management system, as well as critical organizational
processes such as communication, motivation, and leadership.

It can also bring alterations in the way that managers carry out the critical tasks of
planning, organizing, leading, and controlling, and the ways they perform their
managerial roles.

Deciding how to change an organization is a complex matter because change disrupts
the status quo and poses a threat to many, prompting some employees to resist
attempts to alter work relationships and procedures.
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
Organizational learning, the process through which managers try to increase the ability
of organizational members to understand and appropriately respond to changing
conditions, can be an important impetus for change.

Assessing the need for change calls for two important activities: recognizing that there
is a problem and identifying its source. Sometimes the need for change is obvious, but
at other times, problems develop gradually, making it more difficult to recognize that
change is needed.

To discover the source of organizational problems, managers need to look both within
and outside of the organization.
Deciding On the Change To Make
Once managers have identified the source of the problem, they must decide what they think
the organization’s ideal future state would be and begin engagement in planning how they are
going to attain the organization’s future state.

This step also includes identifying obstacles or sources of resistance to change.
Obstacles to change are found at the corporate, divisional, departmental, and
individual levels of the organization.

Corporate-level changes, even seemingly trivial ones, may significantly affect how
divisional and departmental managers behave. For this reason, an organization’s
present strategy and structure can be powerful obstacles to change.
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
Whether a company’s culture is adaptive or inert also can facilitate or obstruct change.
Organizations with entrepreneurial, flexible cultures are much easier to change that are
organizations with more rigid cultures.

The same obstacles to change exist at the divisional and departmental levels as well.
Division managers may differ in their attitudes toward changes proposed by top
managers, and if their interests and power seem threatened, will resist those changes.
Managers at all levels usually fight to protect their power and control over resources.

At the individual level, people are often resistant to change because change brings
uncertainty and stress.

Managers must recognize and take into consideration potential obstacles that can make
change a slow process. Improving communication and empowering employees by
inviting them to participate in the planning for change can help to overcome resistance
and allay fears. In addition, managers can sometimes overcome resistance by
emphasizing group or shared goals such as organizational efficiency and effectiveness.

The larger and more complex an organization, the more complex the change process
is.
Implementing the Change
Generally managers introduce and manage change from the top down or from the bottom up.

Top down-change is implemented quickly. Top managers identify the need for
change, decide what to do, and then move quickly to implement the changes
throughout the organization.

Bottom-up change is typically more gradual. Top managers consult with middle and
first line managers, and then over time, managers at all levels work to develop a
detailed plan for change. A major advantage of bottom-up change is that it can co-opt
resistance to change from employees.
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Evaluating the Change
The last step in the change process is to evaluate how successful the change effort has been in
improving organizational performance.

Using such measures as market share, profits, or the ability of managers to meet their
goals, managers can compare how well an organization is performing after the change
with its performance prior to the change.

Managers also can use benchmarking, which is the comparison of their performance
on specific dimensions with the performance of high performing organizations, to
decide how successful a change effort has been. Benchmarking is a key tool in total
quality management.
IV. ENTREPRENEURSHIP, CONTROL, AND CHANGE

Entrepreneurs are the people who bring about change to companies and industries
because they see new and improved ways to use resources to create products
customers will want to buy.

Entrepreneurs assume the risk associated with starting a new business, which is
substantial since many new businesses fail. They receive all of the returns or profits
associated with the new business venture.

Employees of existing organizations who notice opportunities for product or service
improvements and are responsible for managing the development process are known
as intrapreneurs.

There is an interesting relationship between entrepreneurs and intrapreneurs. Many
intrpreneurs become dissatisfied when their employers decide not to support their new
product ideas and development efforts. Very often they leave their employer to found
new ventures that may compete with the company they left.

Frequently, founding entrepreneurs lack the skill, patience, or experience to engage in
the difficult work of management. Therefore, they must hire managers who can create
an operating and control system that will help the new venture to prosper.
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V. SUMMARY AND REVIEW
LECTURE ENHANCERS
Lecture Enhancer 8.1
ANTICIPATING THE NEED TO CHANGE
Major shifts in the competitive landscape may seem to appear overnight, but in reality, they
usually evolve quietly over a number of years. CEOs usually have enough time to adapt to
the shift once they observe uncertainty creep into the competitive picture, but only if they are
willing to embrace the need for change.
In order to make prudent decisions regarding change within an organization, a manager must
first understand how the entire industry in changing, according to Anita McGahan, a professor
at Boston University’s School of Management. As a result of extensive research, she has
identified four distinct trajectories of change that industries evolve along – radical,
progressive, creative, and intermediating. Dr. McGahan asserts that if CEOs understand the
change trajectory of their industry, they can then determine which change strategies are most
appropriate for their individual company. Below is a description of each..
Radical Change: Radical change occurs when an industry’s core assets and core activities are
both threatened with obsolescence. Under this scenario, the knowledge and brand capital built
up in the industry erode, as do customer and supplier relationships. During the 1980s and
1990s, an estimated 19% of U.S. industries went through some stage of radical change. A
good example is the travel business. The core activities and core assets of travel agencies
came under fire as the airlines implemented systems to enhance direct price competition (such
as SABRE and other reservations systems) and as the agencies’ clients turned to web-based
systems that offered new value, such as Expedia, Orbitz, and Travelocity.
Progressive Change: When neither core assets nor core activities are threatened, the
industry’s change trajectory is progressive. Over the past twenty years, this has been by far
the most common trajectory, with about 43% of U.S. industries changing in this manner. An
example is the commercial airline industry. Innovators like Southwest and JetBlue succeeded
not because of the incumbents’ strengths became obsolete but because the upstart firms had
smart insights about how to optimize efficiency.
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Intermediating Change: Managing a company that is experiencing intermediating change is
extraordinarily difficult. Although the core activities of industries on this change trajectory
are threatened, the core assets of these industries, such as knowledge, brand capital, or
patents, can retain most of their value, if they are used in new ways. Management’s challenge,
therefore, is to find new and sometimes unconventional ways preserve valuable assets and
extract value from core resources while simultaneously restructuring key relationships. In the
music industry, for instance, recording companies are beginning to sell their services a la carte
to aspiring musicians rather than making huge investments in the artists upfront and incurring
all the costs of artist development. The customer and the activities have changed, but the core
resource, the recording companies’ ability to develop new artists, retains its value.
Creative Change: In industries on a creative change trajectory, relationships with customers
and suppliers are generally stable, but assets turn over constantly. The film production
industry is a good example. Large production companies enjoy ongoing relationships with
actors, agents, theater owners and cable television executives. Within this network, they
produce and distribute new films all of the time. This combination of unstable assets (new
films) and stable relationships (with buyers and suppliers) makes it possible to deliver
superior performance over the long term.
Dr. McGahan warns that the four change trajectories are not evenly distributed among
industries. Surprising, radical change affects less than one-fifth of all industries, despite the
amount of attention given to it. More prevalent are progressive and intermediating change. By
understanding of these trajectories, a manager can avoid the looming fear of industry change
by anticipating how change will unfold in their industry and how to take advantage of
opportunities as they emerge.
Adapted from “How Industries Change”, by Anita McGahan, Harvard Business Review, October 2004, p. 86.
Lecture Enhancer 8.2
USING THE EXIT INTERVIEW AS A CONTROL SYSTEM
Feedback on problems is the only way to prevent them from recurring. One often-overlooked
way of getting this feedback from employees is through the exit interview. Interviews with
employees who voluntarily leave the organization serve a dual purpose. For the employee,
exit interviews are a chance to say many things they haven’t been able to say before. For
employers, the interviews can be an excellent source of information. Many companies,
however, do not conduct exit interviews or conduct them ineffectively.
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A good exit interview should consist of structured and unstructured questions. If the employee
is counting on a reference, he or she may be unwilling to be too truthful. To put the employee
at ease and get honest information, some human resource professionals recommend writing
the reference in advance and letting the employee know at the beginning of the interview.
Then questions such as the following can be used to get honest information about the
company as a whole.
“What did you like most about working here?” This helps gain insight into how the employee
perceives the corporate culture. At AT&T one of the answers most frequently heard is that
they appreciated the benefits package. When exiting employees mention this, it reaffirms to
the company that the investment in benefits is paying off.
“What do you feel good about having accomplished?” This helps determine what
responsibilities gave the employee a sense of accomplishment.
“If you were in charge here, what would you change?” This question is used to give the
employee a chance to figuratively change the work environment. Prepare for a candid answer.
“What best helped you achieve your goals?” This is where managers find out which
employee-support systems are working and which are not. If, for example, the vice
president’s open door policy was useful in getting some project underway, the policy could be
encouraged among other senior management.
“What did you dislike about the work environment here?” An exit interview survey at a
Boston hospital showed that twenty percent said they had problems with the work schedule
and 15 percent said they disliked their direct supervisor. This information encouraged hospital
administrators to implement schedule alternatives and management training for supervisors.
Finally, the exit interview information should be used. Managers at AT&T produce a twiceyearly, in-depth analysis of exit-interview findings, which are presented to the Senior Vice
President of Human Resources. The information is used to reexamine policies, make
suggestions for change, and generally help retain skilled employees. Some of the best ideas
have come from people who are leaving.
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Lecture Enhancer 8.3
THE CONTROL EXPERIMENTS
In Search for Excellence, the Peters and Waterman study of America’s excellent corporations,
recounted an experiment conducted by an industrial psychologist. The subjects were given
some difficult puzzles to solve and some rather dull proofreading to do. While they attempted
these chores, a raucous audiotape consisting of one person speaking Spanish, two people
speaking Armenian, a mimeograph machine running, a chattering typewriter, and street noise
ran in the background. Half the subjects were given a button they could push to suppress the
noise. The other half were not. Those with buttons to push solved five times more puzzles
and made one-quarter as many proofreading errors as those who had no button. The news was
that never once (and the experiment was repeated several times) did anyone ever push his or
her button. The mere fact that people perceived that they had a modicum of control over their
destiny—the option of pushing the button—led to an enormous improvement in performance.
In the follow-up book, A Passion for Excellence, another experiment is described, this one at
Edison, New Jersey, site of a Ford Motor assembly plant. They had begun an experiment that
parallels the one in the lab. Every person on the line in the huge facility was given access to a
button that he or she could push to shut down the line—quite a gutsy move on the part of the
plant manager. The results that follow occurred during the first 10 months of the experiment.
To begin with, Edison, New Jersey, is not like an industrial psychology lab. People did push
their buttons at Edison. To be precise, they shut the facility down 30 times the first day and
about 10 times a day thereafter. The good news is that after the first day the average shutdown
lasted only about 10 seconds—just time enough to make a quality adjustment, a tweak, a
twist, a turn, to tighten up a nut or bolt.
Productivity in the plant did not change. Three other indicators, however, are worthy of note.
The number of defects per car produced dropped during the first months of the experiment
from 17.1 per car to 0.8 per car. The number of cars requiring rework after they had come off
the line fell by 97 percent. And the backlog of union grievances plummeted. Moreover, the
change in attitude was as extreme as the numbers. One old pro on the line commented, “It’s
like someone opened the window and we can breathe”.
MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
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Discussion
1. What is the relationship between organizing and controlling? (LO1)
The text defines controlling as the process whereby managers monitor and regulate how
efficiently and effectively and organization and its members are performing the activities
necessary to achieve organizational goals.
In previous chapters the text defines planning and organizing as the process whereby mangers
develop the organizational strategy and structure that they hope will allow the organization to
use resource most effectively to create value for customers.
In order to control the organization, managers must monitor and evaluate whether their
organization’s strategy and structure (which was developed during the organizing function)
are working as they intended, how they could be improved, and how they might be changed if
they are not working.
2. How do output control and behavior control differ? (LO1)
In an output control system managers must first choose the set of goals or output performance
standards or targets that they think will best measure efficiency, quality, innovation, and
responsiveness to customers for their organization. Then they measure whether or not the
performance goals and standards are being achieved at the four main levels in an organization
(corporate, divisional, functional, and individual levels.)
As its name insinuates, behavior control systems involve providing mechanisms to ensure that
workers behave in ways that make the structure work. It concentrates on controlling the
behavior of the workers opposed to their output or results. The three kinds of behavior control
systems are direct supervision, monitoring progress toward goals, and bureaucratic control.
3. Why is it important for managers to involve subordinates in the control process? (LO1)
It is very important to involve subordinates in the control process in order to achieve success
in any organization. If subordinates are involved in setting the goals and standards, they will
feel a sense of ownership toward them, which will motivate them to work to achieve those
goals. They will be more committed to goals that they helped to design. It will also help to
ensure that unrealistic goals are not created.
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4. What is organizational culture and how does it affect the way employees behave? (LO2)
The text defines organizational culture as a specific collection of values, norms, and standards
of behavior shared by people and groups in an organization which controls the way
employees interact with each other and work toward organizational goals. If organizational
culture is in place then employees are not controlled by some external system of constraints,
but rather, employees make organizational values and norms their own, and then they make
decisions and act in accordance with these values and norms. Employees also become focused
on thinking about what is best for the organization in the long run, taking actions and making
decisions that are oriented toward helping the organization to perform well.
5. What kind of controls would you expect to find most used in (a) a hospital, (b) the Navy,
(c) a city police force. Why? (LO1)
A hospital would most likely use output and behavior control systems. Ratios such as the
number of days outstanding for receivables are used to determine the economic health of the
hospital. Operating budgets are used for each department as well as each function (i.e.,
marketing and advertising) of the hospital. Organizational goals, such as the desire to achieve
the best reputation in the treatment of heart disease, are usually established.
Behavior controls, such as direct supervision and bureaucratic control, are also very common.
Interns and residents of the hospital are regularly monitored to ensure that they are making the
correct diagnosis for patients. Bureaucratic controls are evident in the abundance of rules,
policies and procedures that are established and must be obeyed. This is done to ensure safety,
health and well being of the employees and patients of the hospital.
The Navy primarily uses behavior and culture control systems. The behavior of enlisted
personnel is constantly monitored and they are expected to follow a plethora of rules,
including the way that they should walk, talk, and respond to superiors. There is a deep
culture entrenched in the military. Since members of the Navy are representing their country
and their arm of the military at all times, there is a high level of behavior that is expected of
them, especially when they are in uniform.
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A city police force uses output, behavior, and clan control systems. Since the city established
a budget for the police force, they are under the control of their output. They are expected to
keep the crime level below certain levels working within their budget. Behavior controls are
used when policemen are expected to follow established procedures in many of their duties. A
culture is created within the police force in regards to the way that they fulfill their duties.
Because their purpose to protect the people, they should deal with the community in a
professional manner and develop a trusting relationship with its members.
Action
6. Ask a manager to list the main performance measures that he or she uses to evaluate how
well the organization is achieving its goals. (LO1)
(Note to Instructors: The following are some examples of performance measures.)
Managers can use financial measures to determine the performance of the company. These
include financial ratios such as profit ratios, leverage ratios and activity rations (mentioned in
the text.) If organizational goals are used such as: the company must be first or second in its
industry in terms of level of profit; increase the level of sales; increase the quality of inputs or
lower their costs; develop a number of new products or patents, a manager would need to
measure the respective activities and compare them against the goals to evaluate performance.
If operating budgets are used to measure performance, then budget are set for functions,
divisions, or products and then actual figures are measured against budgeted figures at
different time intervals throughout the budgeted period.
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7. Ask the same manager or a different manager to list the main forms of output control and
behavior control that he or she uses to monitor and evaluate employee behavior. (LO1)
Examples of output control systems include: financial controls, organizational goals and
operating budgets. Examples of behavior control systems include: direct supervision
monitoring progress toward goals and bureaucratic control.
8. Interview some employees of an organization and ask them about the organization’s
values, norms, socialization practices, ceremonies and rites, and special language and
stories. Referring to this information, describe the organization’s culture. (LO3)
Bloomberg Financial Markets in Princeton New Jersey has a very unique culture. There are
no offices or internal walls so that everyone is able to see everyone else at all times. Dress is
very casual as is conversation. The company provides lunch to all employees as well as
snacks and soft drinks throughout the day. This encourages employees to not take a very long
time for lunch with some employees even eating at their desks. Besides fresh air there is no
reason for employees to leave the building. By 5:30 most of the employees are gone and not
many work more than 40 hours a week. Employees are encouraged to spend time
familiarizing themselves with the many features of the Bloomberg terminal, which provides
an abundance of financial information on stocks, bonds and mutual funds. This affords the
employees leisurely time to explore a wide array of information offered on the Bloomberg.
Since employees are free to roam throughout the building, a very social atmosphere exists.
Many of the younger employees socialize outside of work, playing together on softball teams
and taking ski vacations.
9. Interview an entrepreneur to learn how he or she organized a new venture. (LO4)
Answers to this question will vary, depending upon the entrepreneur interviewed, the size of
his or her business, and the industry in which it competes. In general, however, organization
within the entrepreneurial venture must be addressed at both the macro and a micro level.
The macro-level involves the structuring of the business itself, while the micro-level is
concerned with day-to-day operational issues.
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At the macro level, the task of organizing begins with the development of a business plan. A
business plan is a well researched, written document that outlines the objectives of the
business and strategies to be used to achieve objectives. It serves not only as a strategic
planning document, but also as a road map to guide daily operations, and a sales tool when
attempting to attract financial investors. A well written business plan is typically organized by
functional area - it will include a marketing plan, human resources plan, operations plan, and
a financial plan. The human resources section of the business plan will contain an
organizational chart outlining the chain of command. In this section the entrepreneur
addresses other organizational structure issues, such as decentralization, line vs. staff
positions, duties of key personnel, delegation of authority, etc.
At the micro level, an organized approach to resource deployment of resources is critical since
the most immediate goal of start-ups is to achieve break-even status and from there, begin
generating profits. Effective organization of time is critical, since entrepreneurs always have
too much to do and priorities often shift. Also, effective organization of both human and
financial resources presents an ongoing challenge since both are sorely needed to fuel growth,
but at the same time, must be tightly controlled to avoid cash flow problems. Inefficiency or
waste within an entrepreneurial venture can lead to financial disaster.
AACSB standards 1, 3, 10
Notes for Building Management Skills
Understanding Controlling (LO1, 2)
1.
At what levels does control takes place in this organization?
Control can take place at the corporate, divisional, functional, and individual levels.
2.
Which output performance standards (such as financial measures and organizational
goals) do managers use most often to evaluate performance at each level?
Performance standards include financial measures (such as ratios), organizational goals, and
operating budgets. Refer to the answer to question #3 in Management in Action for examples
of these standards.
3.
Does the organization have a management by objectives system in place? If it does,
describe it. If it does not, speculate about why not.
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Management by objectives (MBO) is a system of evaluating subordinates by their ability to
achieve specific organizational goals or performance standards and to meet operating budgets.
Without measuring whether goals or standards are met, it is pointless to establish them
because one would never now if they were achieved. A management by objectives system
involves the following steps:
 Specific goals and objectives are established at each level of the organization.
 All levels of employees participate in the goal setting is a process.
 Periodic reviews are made of progress toward meeting goals.
4.
How important is behavior control in this organization? For example, how much of
managers’ time is spent directly supervising employees? How formalized is the organization?
Do employees receive a book of rules to instruct them about how to perform their jobs?
Behavior control systems are use to enable managers to keep their subordinates on track and
make their organizational structures work as they are designed to. Direct supervision is used
when managers actively monitor and observe the behavior of their subordinates, teach
subordinates the kinds of behaviors that are appropriate and inappropriate, and intervene to
take corrective action as needed. It is a very effective way of motivating employees but there
are certain problems associated with direct supervision. First, it is very expensive because
each manager can only personally manage a small number of subordinates effectively.
Second, it can demotivate subordinates if they feel that they are under close scrutiny or are not
free to make their own decisions. Third, for many jobs direct supervision is not feasible or
possible, such as complex jobs and responsibilities that can only be measured over long
periods of time.
In some industries it is imperative that a set or book of rules exists. Other industries, however,
rely on employees’ creativity in devising more effective and efficient ways to accomplish
tasks and design products. In this case a very formalized environment with a rule book to
follow would not be beneficial for success.
5.
What kind of culture does the organization have? What are the values and norms? Do
employees tell any particular stories that reveal the organization’s norms and values? What
effect does the organizational culture have on the way employees behave or treat customers?
There are many different types of organizational culture. One example would be a very
conservative culture that is filled with many “unwritten rules” that are followed by the
employees. This might include a dress code, where men and women where dark, conservative
suits with white shirts, and men wear wing-tipped shoes and do not wear flashy ties. In this
organization one must work upwards of 70 hours a week including Saturdays in order to
succeed.
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In the organization, the values and norms inform employees about what goals they should
pursue and how they should behave to reach those goals. An example is an organization
where values create an environment where creativity and innovation are encouraged. Norms
are in place that allow employees to experiment with new ideas in an attempt to create new
ways of doing things or creating new products.
The culture can have a significant impact on how employees treat customers. For example, in
a retail store, employees might be encouraged or required to approach customers in a friendly
manner and offer assistance before the customer is able to pose a question. Also, some
cultures practice the rule that the customer is always right so that even if the employee
disagrees with the customer, they must behave in a manner that indicates that the customer is
right in their conviction.
6.
Based on this analysis, do you think there is a fit between the organization’s control
systems and its culture? What is the nature of this fit? How could it be improved?
If there is not a good fit between the organization’s control system and culture, it should be
very apparent. There will most likely be a break down somewhere in the system where
employees are not reaching the standards or are very unhappy in their positions.
AACSB standards 1, 3, 10
Managing Ethically (LO1)
1. Either by yourself or in a group, think about the ethical implications of organizations
monitoring and collecting information about their subordinates. What kind of
information is it ethical to collect or not to collect? Why? Should managers and
organizations inform subordinates they are collecting such information?
Nearly three-quarters of all large companies that responded to a survey conducted by the
American Management Association said that they actively record and review at least one of
the following: employees’ phone calls, e-mail, Internet connections, or computer files.
Reasons given by companies for engaging in these practices include prevention of personal
use or abuse of company resources, prevention or investigation of corporate espionage or
theft, cooperation with law enforcement officials in investigations, and resolution of technical
problems, or other special circumstances.
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Because their objective is to protect the company’s best interests, employers feel that their
behavior is both legal and ethical. Ideally, companies should only collect information that is
job specific. From a pragmatic viewpoint, however, when scanning messages that move
through a company’s server, it may be difficult to distinguish in advance an employee’s
professional from personal correspondence.
Often employees are unaware that their telephone and/or computer communications are not
confidential. Therefore, if an organization regards all communications sent or received during
work hours and using company equipment as corporate property, this should be formally
stated as a policy. Again, the most ethical approach is to use monitoring only when the
organization has good grounds for suspecting that there is abuse.
2. Similarly, some organizational cultures like those of Arthur Andersen, the accounting
firm, and Enron seem to have developed norms and values that caused their members
to behave in unethical ways. When and why does a strong norm that encourages high
performance become one that can cause people to act unethically? How can
organizations prevent their values and norms from becoming too strong?
Enron’s corporate culture seemed to exemplify risk taking, aggressive growth and
entrepreneurial creativity, which are all positive values. However, these values were not
balanced by a genuine concern for corporate integrity, customer needs, and shareholder value.
Many believe that this lack of balance, combined with Enron’s creation of a “yes” culture that
squelched any internal complaints or negative feedback, resulted in norms that encouraged
overwhelming pressure to conform and an abuse of power.
Hard-charging, aggressive cultural norms must always be tempered with a sense of morality
and integrity. Careful monitoring and preservation of this delicate balance will help a
company avoid ethical breaches.
AACSB standards 1, 2, 3, 6, 7
Notes for Small Group Breakout Exercise
How Best to Control the Sales Force? (LO 1, 2)
1.
Design the control system that you think will best motivate salespeople to achieve
these goals.
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A control system that would motivate salespeople to achieve set goals may include:
 Meeting with their supervisor regularly to set and agree upon the level of sales they
should strive to achieve each month, quarter, and year.
 Determining how many cold calls they should conduct or the number of new
customers they should contact during a specific period.
 Maintaining records for all clients and potential clients that they have visited or made
contact with.
 Preparing brief summaries of the results of these contacts to be submitted regularly to
their supervisor.
 Holding meetings between salespeople and supervisors on a regular basis to determine
if the salesperson is achieving their goals and if they are having any problems.
2.
What relative importance do you put on (1) output control, (2) behavior control, and
(3) organizational culture in this design?
All three types of control systems are important in this design. An examples of output control
is the establishment of sales goals to be reached during a specific period. Behavior controls
are found in the system by the presence of prescribed behaviors that should be performed by
the salespeople. These include: the amount of time that they should spend seeking new
business and the required submission of client logs. Organization culture is underlying in this
design since the setting of goals by both the supervisor and salesperson shows that
management values the opinions and the abilities of their employees. The dictation of goals to
the salesperson would signal to them that their input is not valued in this organization.
AACSB standards 1, 3, 10
Be the Manager (LO1, 2)
1. What kind of outputs controls will best facilitate positive interactions both within the teams
and between the teams?
Managers and each team should be given organizational goals that are challenging and require
them to “stretch”.
2. What kind of behavior controls will best facilitate positive interactions both within the
teams and between the teams?
With the MBO approach, everyone has knowledge of what is going on, what is expected of
the teams and of individuals, and managers and employees buy into their goals because they
are part of the decision process.
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3. How would you go about helping managers develop a culture to promote high team
performance?
A brainstorming session (including employees) could be used to generate ideas for ways to
develop a culture that is conducive to achieving goals. Corporate values and norms should be
clearly articulated by the leadership, and various methods of fostering the internalization of
those values and norms by employees should be developed.
AACSB standards 1, 2, 3, 6, 7
BUSINESS WEEK CASES IN THE NEWS
Case Synopsis: Cracking the Whip at Wyeth
When Robert Ruffolo was appointed executive Vice President for R&D at Wyeth, he was
given the mandate of shaking up the drug maker’s mediocre performance in that division. His
controversial changes included establishing quotas for how many compounds must be
churned out by company scientists. Bonuses were held hostage to managers’ meeting of their
quota. Wyeth’s problems are reflective of those plaguing its industry. New drug development
is down 47% from its peak during the late 1990’s. Ruffolo wants to bring greater efficiency to
the innovation process by instilling tougher discipline as a means of increasing productivity.
Although his approach has critics, analysts say that Wyeth’s pipeline has shown major
improvement.
Questions:
1. What kinds of control systems tend to be used to measure the performance of R&D
scientists?
It seems that in the past, behavior controls were used to measure their performance. A
scientist was considered a good performer as long as he or she engaged in appropriate
scientific inquiry. Engagement in such activities was more important than quantity of output
from it.
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2. What kind of control system did Ruffolo institute? What are the various parts or
measures of the control system he instituted?
The review process he initiated is an example of concurrent control. Under this review
process, a value is determined for every project in the pipline, based on a host of factors.
During an annual review, these ratings are used to decide which projects are given high
priority, low priority, or are discontinued. Establishing a quota for number of new compounds
developed is an example of output control.
3. What are the pros and cons of his system? Does it seem to be working?
The criticisms of Ruffolo’s use of output control are: 1) increased anxiety level among
scientists, 2) encouraging scientists to overlook problems with some compounds in order
to make their numbers, and 3) encouraging scientists to focus on those projects that are the
safest gambles. However, it appears that the use of such controls has resulted is helping
the organization to achieve its objectives. Wyeth’s pipeline has improved, with a number
of potentially hot-selling products likely to hit the market within the next few years.
Prior to the introduction of Ruffolo’s review system, which is an example of a concurrent
control system, drugs with the least chance of paying often ended up with the most
resources. The new rigor imposed by this system forced scientists to terminate troubled
projects earlier in the transformation process, thus saving time and money.
AACSB standards: 1, 3, 9, 12, 13
Chapter 8 Video Case Teaching Note
Johnson & Johnson: Creating a Global Learning Organization
Teaching Objective: Observe how a large, decentralized global company uses an innovative
solution to meet the challenge of providing training and employee development.
Video Summary: This video illustrates how J&J is able to control and enhance training and
development in its highly decentralized organization. With Internet technology, the company
created an e-University that provides learning across its 230 independent business units.
Employees of the various companies are able to tap into each other’s areas of expertise, share
ideas, and contribute to a diversity of thought while the separate businesses retain the
autonomy typically associated with decentralization.
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Questions:
1. Why is eUniversity a valuable learning tool for the Johnson & Johnson organization?
eUniversity created a way for J&J to provide training and development opportunities for the
hundreds of thousands of employees of its 230 companies worldwide. The Web-based system
provides programs from corporate headquarters, various J&J companies, and outside vendors.
The system helps J&J retain and take advantage of the independence of its separate units and
capture their diversity of thought. The cross-fertilization of knowledge gives employees not
only an opportunity to learn and plan personal and professional development but also a career
competitive advantage.
2. How does eUniversity manage to operate in a decentralized environment?
J&J wanted to support learning without losing the advantages of a decentralized company.
eUniversity accomplished this by consolidating disparate learning technologies into a single
learning system. The system uses Internet technology to leverage and integrate existing
functional, regional, and operating company-specific learning and development systems.
3. What are the benefits, both expected and unexpected, of eUniversity?
J&J managers expected the platform to provide learning opportunities critical to employee
training and professional development, one of the values expressed in the J&J Credo. They
also expected that the employee training and development enhanced by eUniversity would
help J&J sustain its competitive advantage. There were also unexpected benefits.
Management didn’t anticipate how much learning employees would gain from peers in other
operating units. Also, smaller companies gained previously unavailable access to the best
learning experiences from other companies and from outside vendors. Finally, employee
interaction through eUniversity fostered a new opportunity to discuss the J&J Credo.
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