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Chapter 16
Management
Control
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 2
Learning Objectives
After reading this chapter, you should be able to:
• Describe management control and understand the
importance of control systems.
• Identify the four basic management control approaches.
• Describe the steps a manager would take to apply a
bureaucratic control process.
• Identify the major types of bureaucratic control.
• Generate the basic framework for a balanced scorecard.
• Differentiate between market and financial control.
• Distinguish between system and person factors as the
focus of control.
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Slide 3
The Importance of Control
• Control is the process of comparing performance
to standards and taking corrective action.
• It ensures that:
standards are met
errors are limited
quality is acceptable
products are safe
the company is performing at the highest possible
level
• Control is closely associated with planning.
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Categorization of
Control Approaches
Slide 4
Control approaches can be categorized according to
two factors – type and focus:
• Type - divided into formal and informal approaches
Formal control systems consist of written rules
Informal control systems rely on unwritten expectations
• Focus – directed at the outcome or the process
Outcome approach focuses on the results of a business
process
Process approach focuses on how the work is performed
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Slide 5
Control Approaches Model
Marketing Control
Subjective Control
Financial Controls
Focus
Outcomes
Operations Management
Bureaucratic Control
Clan Control
Process
Balanced Scorecard
Formal
Informal
Type
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Informal and OutcomeFocused Control
Slide 6
• Characterized by subjective control - an informal
approach based on global assessment of
outcomes
• Subjective control:
does not typically utilize explicit standards
does not specify how deviations from an acceptable
level should be handled
is common in smaller businesses and service settings
is the “no news is good news” approach
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Formal and Process-Focused
Control: Bureaucratic Control
Slide 7
• Bureaucratic control is a formal control approach
that operates in a cycle and is characterized by
written guidelines and controls.
• Involves:
the application of standards to assess
performance
the application of corrective actions to regulate
performance and bring it back to the level of the
standards.
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The Bureaucratic Control
Process
1. Establishing
Standards
2. Performance
Measurement
3. Identifying
Gaps
4. Corrective
Action
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Slide 8
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The Bureaucratic Control
Process (cont)
Slide 9
• Establishing Standards
Standards should be participative rather than simply
implemented from the top down so that employees
understand and are committed to them.
Standards come from:
goals
statistical analysis
benchmarking
• Performance Measurement
Use of objective data, which is free from error or bias
Use of subjective data, which involves human judgement
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The Bureaucratic Control
Process (cont)
Slide 10
• Identifying Gaps
Compare standards with performance measures
Upper and lower control limits establish:
acceptable variations
normal variations
unacceptable variations
• Corrective Action
What should management do?
Nothing
Take action
Change standards
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Slide 11
Types of Bureaucratic Control
Feedforward Control
Concurrent Control
Feedback Control
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Slide 12
Types of Bureaucratic Control
(cont.)
• Feedforward control
Designed to prevent problems before they
occur
• Concurrent control
–Takes place as the work process is being
carried out
• Feedback control
–Occurs after a process has been completed
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Slide 13
The Balanced Scorecard
• A balanced scorecard is a technique designed
to control and improve:
customer service
learning and growth
finance
internal business processes
• Links strategy to action
• Is more broad than bureaucratic control
• Focus on:
priorities
the work process
how things are done
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Slide 14
Balanced Scorecard Format
Objectives
Measures
Targets
Initiatives
Financial what we need to
do to succeed
financially
Customer what we need to
do to excel at
customer service
Internal Business
Processes - what
we need to do to
have world class
processes
Learning and
Growth - how to
change and increase
our potential and
effectiveness
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Formal and OutcomeFocused Control
Slide 15
• The regulation of performance by applying
the standards or guidelines to the outcomes
of a process through:
Market control - the use of indicators of
market values as standards for regulating
performance
Financial controls - the use of various
monetary measures to regulate performance
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Slide 16
Types of Financial Controls
Budgetary Control
Financial Ratios
McGraw-Hill/Irwin
Financial Statements
Activity-Based
Costing
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Slide 17
Types of Financial Controls
(cont.)
• Budgetary control - used to specify amounts to be
expended for various activities or events
Can help managers control and predict costs
• Financial Statements - tools that are used to
assess and control the financial health of an
organization
–Balance sheets
–Profit and loss (income) statements
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Slide 18
Types of Financial Controls
(cont.)
• Financial Ratios - provide an overall check of
performance
Liquidity ratios - an organization’s ability to pay short-term debt
Leverage ratios - the amount of funds available in an organization
from shareholders and creditors
Profitability ratios - indicate the amount of financial return from an
investment
• Activity-Based Costing - associates costs with tasks
calculated for:
 receiving and processing sales orders
 expediting supplies and production
 distribution
 resolving errors and problems
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Informal and ProcessFocused Control
Slide 19
• Emphasizes an implicit sense and common
understanding of how things should be
done
• Does not rely on explicit guidelines and
standards
• Assumes that people have an internal set
of standards that will guide how they
perform
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Slide 20
Clan Control
• Clan control is a reliance on corporate
culture and the norms it develops as an
informal means for regulating the work
process
• Employees control themselves
• Clan control works best if:
the organization is constantly changing
the organization has a strong culture
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Management Control
Revisited
Slide 21
• Should control be directed at people,
systems, or some other aspect of the
company?
Emphasis should be on systems and
performance rather than people.
Focusing on people can result in resistance
and negative reactions
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved