Download Chapter 16

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Chapter
16
Managerial Control
McGraw-Hill/Irwin
Management, 7/e
Copyright © 2007 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
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employees
How to design a basic bureaucratic control system
The purposes 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 in which market control
mechanisms are used by organizations
How clan control can be approached in an
empowered organization
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Control
 Control is essential for the attainment of any
management objective
 Control is any process that directs the
activities of individuals toward the
achievement of organizational goals
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Characteristics of Control
 Managers can apply three broad strategies for
achieving organizational control
 Bureaucratic control is the use of rules,
regulations, and formal authority to guide
performance
 Market Control involves the use of pricing
mechanisms to regulate activities in organizations
as though they were economic transactions
 Clan control I based on the idea that employees
may share the values, expectations, and goals of
the organization and act in accordance with them
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Control Problems
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Bureaucratic Control Systems: The
Control Cycle
 A typical bureaucratic control system has
four major steps
 Setting performance standards
 Measuring performance
 Comparing performance against the standard
and determining deviations
 Taking corrective action
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The Control Cycle
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Approaches to Bureaucratic Control
 There are three approaches to bureaucratic
control
 Feed forward Control takes place before
operations begin and includes policies,
procedures, and rules designed to ensure that
planned activities are carried out properly
 Concurrent control takes place while plans are
being carried out and includes directing,
monitoring, and fine-tuning activities
 Feedback control focuses on the use of
information about results to correct deviations
from the acceptable standard after they arise
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Management Audits
 Management audits are an evaluation of the
effectiveness and efficiency of various
systems within an organization
 Management audits may be
 External – this occurs when one organization
evaluates another organization
 Internal – these are a periodic assessment of a
company’s own planning, organizing, leading,
and controlling processes
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Budgetary Controls
 Budgetary control is the process of finding
out what’s being done and comparing the
results with the corresponding budget data to
verify accomplishments or remedy
differences
 This is one of the most widely recognized and
commonly used methods of managerial
control
 It is commonly called budgeting
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Budgetary Control
 Budgetary control begins with an estimate of
sales and expected income
 One of the primary considerations is the
length of the budget period
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Types of Budgets
 Sales budget - Usually data for the sales budget are
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prepared by month, sales area, and product
Production budget - The production budget commonly
is expressed in physical units
Cost budget - The cost budget is used for areas of the
organization that incur expenses but no revenue, such
as human resources and other support departments
Cash budget - The cash budget shows the anticipated
receipts and expenditures, the amount of working
capital available, the extent to which outside financing
may be required, and the periods and amounts of cash
available
Capital budget - The capital budget is used for the cost
of fixed assets like plant and equipment
Master budget - The master budget includes all the
major activities of the business
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Financial Controls
 Two financial statements that help control
overall organizational performance are:
 Balance sheet shows the financial picture of a
company at a given time
 Profit and loss statement is an itemized
financial statement of the income and
expenses of a company’s operations
 Financial ratios are also an effective approach
for checking on the overall performance of
the enterprise
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The Downside of Bureaucratic Control
 A control system cannot be effective without consideration
of how people will react to it
 Three types of responses
 Rigid bureaucratic behavior occurs when control systems
prompt employees to stay out of trouble by following the rules
rather than doing the right thing
 Tactical behavior leads to ineffective behavior because
employees try to beat the system
 Resistance to control occurs because
 Control systems uncover mistakes, threaten job security
and status, and decrease autonomy
 Control systems can change expertise and power
structures
 Control systems can change the social structure of an
organization
 Control systems may be seen as an invasion of privacy
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Designing Effective Control Systems
 Effective control systems maximize potential
benefits and minimize dysfunctional behaviors
 Five characteristics of effective control systems
 They are based on valid performance standards
 They communicate adequate information to
employees
 They are acceptable to employees
 They use multiple approaches
 They recognized the relationship between
empowerment and control
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Market Control
 Market controls involve the use of economic forces –
and the pricing mechanisms that accompany them – to
regulate performance
 System is based on the principle that as output from
an individual, department, or business unit creates
value to other people, a price can be negotiated for its
exchange
 Two effects of this occur
 Price becomes an indicator of the value of the product
or service
 Price competition has the effect of controlling
productivity and performance
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Market Controls
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Market Controls
 At the corporate level market controls are
used to regulate independent business units
 At the business unit level market controls are
used to regulate exchanges among
departments and functions
 Transfer price is the price charged by one unit
for a product or service provided to another
unit within the organization
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Market Controls
 Market controls are
used at the
individual level to
determine wage
levels for the skills
that employees
possess
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Clan Control: The Role of Empowerment
and Culture
 Managers are discovering that control
systems based solely on bureaucratic and
market mechanisms are insufficient for
directing today’s workforce because
 Employee’s jobs have changed
 The nature of management has changed
 The employment relationship has changed
 Because of this empowerment has become a
necessary aspect of a manager’s repertoire of
control
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Clan Control: The Role of Empowerment
and Culture
 Clan control involves creating relationships
built on mutual respect and encouraging each
individual to take responsibility for his or her
actions
 Employees work within a guiding framework
of values, and they are expected to use good
judgment
 The emphasis in an empowered organization
is on satisfying customers, not on pleasing
the boss
 Clan control takes a long time to develop and
an even longer time to change
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Clan Control: The Role of Empowerment
and Culture
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Looking Ahead
 After Studying Chapter 17, You will know
 The processes involved in the development of new
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technologies
How technologies proceed through a life cycle
How to manage technology for competitive
advantage
How to assess technology needs
The key factors to consider when making decisions
about technological innovation
The roles different people play in managing
technology
How to develop an innovative organization
The key characteristics of successful development
projects
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Performance Standards
 A standard is the level of expected
performance for a given goals
 Performance standards can be set with
respect to
 Quantity
 Quality
 Time used
 Cost
Return
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Measuring Performance
 Performance date is commonly obtained from
three sources
 Written reports, which include computer
printouts
 Oral reports
 Personal observation
 Information must be provided on a timely
basis
Return
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Comparing Performance
 For some activities relatively small deviations
from the standard may be acceptable, in while
in others a slight deviation would be serious
 The principle of exception states that control
is enhanced by concentrating on the
exceptions, or significant deviations, from
the standard
Return
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Taking Corrective Action
 This step ensures that operations are
adjusted where necessary to achieve the
initially planned results
 In computer-controlled production there are
two basic types of control
 Specialist control states that the operators of
computer-numerical-control machines must
notify engineering specialists for corrective
action to be taken
 Operator control states that multi-skilled
operators can rectify their own problems as
they occur
Return
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Balance Sheet
 Te statement itemizes three
elements of the organization
 Assets are the values of the
various items the corporation
owns
 Liabilities are the amounts a
corporation owes to various
creditors
 Stockholders’ equity is the
amount accruing to the
corporation’s owners
Return
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Profit and Loss Statement
 Comparative
statements allow
managers to view
how income and
expenses have
changed over the
last period
Return
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Financial Ratios
 Liquidity ratios indicate a company’s ability to pay
short-term debts
 Current ratio – indicates the extent to which current
assets can decline and still be adequate to pay current
liabilities
 Leverage ratios show the relative amount of funds in
business supplied by creditors or shareholders
 Debt to equity ratio indicates the company’s ability to
meet its long-term financial obligations
 Profitability ratios indicate management’s ability to
generate a financial return on sales and/or
investments
 Return on Investment (ROI) is a ratio of profit to capital
used or a rate of return from capital
Return